The Government's Aim Should Always Be To Im Prove Economic Growth!

Essay by PaperNerd ContributorUniversity, Master's September 2001

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The government should always try and increase the rate of economic growth! Guy Thornton Economic growth is the long run trend of growth of output in an economy, usually measured by the percentage and annual change of GDP. An economy may have a positive or negative growth rate. If it is positive, the economy is expanding. If the growth rate is negative, the economy is contracting. (SEE SOURCE 3) Most governments have the same objectives which are low inflation, low unemployment, stable growth, a suitable balance of payments and a low amount of government borrowing. There are two ways in which a government can increase the rate of growth. It can use demand-side or supply-side policies. There are three types of demand-side policies. Monetary policy uses interest rates. Fiscal policy comprises taxation, expenditure and the level of public borrowing. Exchange rate policies have a major impact on the competitiveness of the economy.

Demand-side policies aim to increase the aggregate demand in the economy. For example reducing interest rates as in Japan makes loans more attractive so that people are encouraged to borrow and invest. As money is invested into labour and equipment, productivity increases. Increasing productivity in many areas of the economy leads to growth. Demand-side policies are seen as short term policies which may lead to inflation (a sustained rise in prices which is measured by the retail price index). Supply-side policies are used to help markets work more efficiently. For example improvements in the education system. Supply-side policies are seen as long term policies which have very little immediate affect on the growth of the economy. The diagram below shows the effects of demand-side and supply-side policies: PRICE LEVELS REAL NATIONAL INCOME The diagram shows that when aggregate demand is increased from AD,AD to AD1,AD1 economic growth will...