Principles of Economics Growth

Question: Discuss about the Principles of Economics Growth. Answer: Introduction: In traditional economics, economic growth is seen as a solution to the problems of unemployment and poverty. It is believed to increase social welfare by increasing the overall spending on social welfare. It is assumed that economic growth increases purchasing power and creates job opportunities. International financial institutions like World Bank and World Trade Organization measure a country's development by its growth rate of an economy. However, this might not give the accurate picture of a country's social welfare structure and its economic growth. Most of the developing countries like India, Indonesia and some of the developed nations like the United States of America show a discrepancy in this theory. In these countries, economic growth was followed by inequality in income. The unequal distribution of income lowers the opportunity to spend more for social welfare. Gini Coefficient is used to measure the inequality (Meade, 2013). With more economic growth, the value of Gini co efficient increases. This is called "paradox of economic growth." Social welfare payments are mostly transfer payments. This part of income gets included in GDP accounting at first. Hence, adding social welfare payments in the accounting process will create "double counting." Spending on unemployment programs does not create immediate results. Hence it cannot be counted while measuring economic growth. The spending on unemployment programs come from transfer payments. Economic growth includes the results of various measurements taken for an economy. Spending for social welfare payments and unemployment programs will yield results, which will be included in the economic growth of a country. Social welfare payments include payments made to carers, disabled and ill persons, retired people, education and other social welfare activities. Most of these attributes do not add any value to the economic growth. Some attributes like education and health provides growth which gives benefits to the economic growth in future, but not in the present (Lewis, 2013). Including spending on social welfare will increase the value of economic welfare. But this increase will be in nominal terms, as in real terms, the value will not portray economic growth. If the social welfare spending is included in economic growth, it will not give the true scenario of the growth of an economy (Soroka, Harell Iyengar, 2016). If a country has a large amount of population who are retired and enjoying pension, then including social welfare in accounting of economic growth will give a large value, but in reality, economic growth is actually decreasing due to the unproductive use of the fund. Most of these purposes have a dead end, i.e. the transaction of value will be a single way path. The spending for social welfare in case of pensions and other similar objectives are not payments for productive services. Hence including it in the economic growth will misguide the observer about the growth of the economy (Mayer, Lopoo Groves, 2016). The types of unemployment present in an economy can be divided into three broad parts, namely, cyclical unemployment, frictional unemployment, and structural unemployment. An economy, over time, experiences many ups and downs. In case of a recession, many people working in an economy loses jobs. This kind of unemployment is called cyclical unemployment as they will get jobs again when the economy starts recovering. In the case of a frictional unemployment, a worker spends his productive time in finding a job. A worker might be in between two jobs, and thus considered unemployed. This is called frictional unemployment (Carrre, Grujovic Robert-Nicoud, 2015). Structural unemployment occurs when there is a mismatch between the demand and the supply in labor market. The skill sets workers are offering and the demand for skills from the employers does not match in this type of unemployment. Structural unemployment can occur when a big firm moves its office overseas. The workers get assert ed and might not fit in any other production process. The consequences of unemployment are harsh for the economy. The degree of this negativity depends on the type of the unemployment. In the case of cyclical unemployment, the economy as a whole gets affected. It takes time to recover from the fluctuations in business cycle. It takes time to resolve the problem of unemployment. In the case of frictional unemployment, unemployment exists for a short period of time. Once the search for the suitable job is over, unemployment caused by this reason reduces. As this is temporary, it only affects the economy in very short to short run. Structural unemployment hampers employment rate the most as this kind of unemployment exists over a long period of time (Dahling, Melloy, Thompson, 2013). In case of cyclical unemployment, people, who gets unemployed, gets job back once the economy gets back on the track. In the case of structural unemployment, people who gets unemployed mostly do not get their job back as the skill set they have might not match with the required skills the other companies demand. People who get affected in structural unemployment might have to incur an extra cost to learn about new technologies in order to get absorbed by other companies. A cyclical unemployment is constrained by a certain time period. After the cause of unemployment is over, people get back to the production process. Structural unemployment occurs especially during technological changes (Wagner, 2014). In the case of an industrys evolution, the number of people under structural unemployment increases. These unemployed persons often remains unemployed as time required for learning a new technology is greater than the service time left for some people. Workers who have enough service y ears left might incur an extra cost to learn about the new technology. This phenomenon often makes people change their respective industry. This shift often costs a portion of the social welfare. Unemployment, in general reduces social welfare. The cost of unemployment for structural unemployment is more than that of cyclical unemployment (Diamond, 2013). References: Carrre, C., Grujovic, A., Robert-Nicoud, F. (2015). DP10692 Trade and frictional unemployment in the global economy. Dahling, J. J., Melloy, R., Thompson, M. N. (2013). Financial strain and regional unemployment as barriers to job search self-efficacy: A test of social cognitive career theory. Journal of counseling psychology, 60(2), 210. Diamond, P. (2013). Cyclical unemployment, structural unemployment. IMF Economic Review, 61(3), 410-455. Lewis, W. A. (2013). Theory of economic growth (Vol. 7). Routledge. Mayer, S. E., Lopoo, L. M., Groves, L. H. (2016). Government spending and the distribution of economic growth. Southern Economic Journal. Meade, J. E. (2013). A Neo-Classical Theory of Economic Growth (Routledge Revivals). Routledge. Soroka, S., Harell, A., Iyengar, S. (2016). 17 Heterogeneity in the impact of immigration on social welfare spending. Handbook on Migration and Social Policy, 330. Wagner, B. (2014). Types of Unemployment. Montana Department Of Labour And Industry, Research And Analysis Bureau.