Economic Growth

Simply put, economic growth is the increase in the value of goods and services provided by an economy.  It is also one of the economic indicators that is used to predict the quality of life for the people in the area specified.  It is measured by an increase in the Gross Domestic Product for a predetermined space of time, usually a calendar year.  When predicting economic growth for a particular community or area, most economists take information like the GDP and other indicators and apply them to models or hypothetical situations to gain a more accurate picture of where an economy is headed.

For example, if a lumber mill operates in a municipality during a calendar year at a steady growth rate of between 1.5 and 3 percent, it will generally be in line with what an economist would consider resonable growth for the community. Initially, the city might want to spend most of its yearly budget on improvements to the mill because it appears to be the city’s main source of economic growth.  Before the city does that, however, they need to look at a lot of different scenarios, which should be provided to them by a professional economic advisor.  These scenarios will help them to determine the future growth of the mill and if it will benefit aspects of the community like quality of life.

This is important, beacause if the quality of life has increased to the point where consumers have developed new tastes, the city might look at spending money on devloping small businesses or better schools to satisfy the population’s new found sophistication.  Otherwise, the people may take their new lifestyle and money and move to a larger town that has more to offer, leaving the mill without any skilled labor.  The town leaders also need to look at real estate values.  If they have gone up and per capita income has risen, additonal funding for the lumber mill may have to be put aside in favor of a hospital or college.  There are also other reasons for diversifaction when it comes to economic growth.  These are factors like competition and environmental concerns.

Competition can ruin a town’s economic growth.  If a less fortunate neighboring town looks at the success of the larger town’s lumber mill, they may decide to open one of their own.  A competeting mill may offer more money and incentives like health care to lure labor away from the original mill.  They may also invest in newer machinery for higher production and be closer to a highway for better distribution.  They may have also have an unlimited supply of lumber and more aggressive land owners who have  cheaper lumber and land to sell. 

By encouraging the growth of small businesses like grocery stores, shopping malls and entertainment venues instead of just focusing on the mill, the original town can diversify its economic growth so that competition like this has a minimal effect. 

The environment also plays an important part in economic growth.  In the case of the lumber mill, once the supply of trees is exhausted, the mill may have to shut down.  As well, residents may move to larger cities if house values drop and other employment is not available.  Believe it or not, the same state government who funded the project of building the lumber mill may even step in and order the county to regrow the forests they have demolished as part of an enviremental plan to maintain the ecological balance of the area.

Of course, real economists use mathematical formulas and complex logic to develop intricate models that predict economic growth, but regional areas like cities and counties don’t have to go that far.  Raw data, simple number crunching, and some common sense is probably just as accurate in predicting economic growth as the finest Solow-Swan growth model.

Posted in Economic Growth & Development