Chapter 39, Problem 2CYU

To determine

The question requires us to determine the better predictor of a future high growth rate in the long run.

Explanation of Solution

A positive change in national income represents growth which happens due to the increase in the value of aggregate demand and aggregate supply over time in an economy.

The following factors can be better predictors for higher future economic growth:

• Higher levels of investment and savings
• Higher current spending on human and physical capital
• Higher current spending on infrastructure and research & development projects, and
• Reforms in labor policies and taxation policies.

For example, an increase in domestic savings increases the supply of loanable funds in the market for loans and thus encourages investors to raise their investment spending by taking loans at lower borrowing costs. So, an increase in domestic savings causes investment spending to increase in the economy.

An increase in investment spending due to an increase in domestic savings will help the firms in installing new machines, and equipment, expanding their branches, hiring physical and human capital, and improving their existing infrastructure. These improvements will increase the aggregate production level in the market and as a result, the growth rate of the national income will rise in the coming future.

A high standard of living is not a good predictor as it may vary according to the level of population. The more the level of population, the less would be the higher standard of living. Moreover, it is not a good criterion to measure as it may lead to biasness and fluctuations.

Economics Concept Introduction

An increase in the aggregate production of goods and services in an economy over time is considered economic growth. Economic growth is a quantitative measurement as it represents growth in numerical form in terms of GDP or National income. It doesn’t say much about the quality of growth in a country.