What is economic growth and what are its limits?

Economic growth and economic development are two terms that are often used interchangeably, but do they mean the same thing? Understanding their definitions and differences is important because they have a major impact on people’s well-being and quality of life. Are there limits to economic growth that can slow it down? Read this article and find out.

What is economic growth?

We understand economic growth as a process that contributes to raising the standard of living of a country’s population. It involves an increase in the value of the production of goods and services, resulting in rising incomes.

It should be noted that growth in no way excludes decline in some sectors. This is because attention is paid to the cumulative effects of economic processes that still achieve a positive result.

Difference between economic growth and development

Sometimes the terms development and economic growth are used interchangeably, which is not correct. These phenomena can be combined, but there are important differences between them. Economic development is a broader concept that refers to qualitative, non-measurable changes that improve the quality of life.

Economic growth, on the other hand, refers to quantitative values – the most commonly used measure is Gross Domestic Product (GDP). Its value depends on the demand for goods and services as well as the supply and efficiency of production factors (labor, human capital, technological progress, etc.).

Types of economic growth

We can distinguish several types of economic growth:

• Extensive – is driven by technological progress and increased investment in labor, as well as the allocation of resources to more efficient industries,
• Intensive – occurs with innovation, is usually associated with extensive growth, its results are long-term and herald a significant intensification of the ability to produce goods and services,
• Stabilized – means steady, uniform growth in the GDP index and the total use of production factors,
• Nonstabilized – the GDP index grows unevenly, which results in costs, waste, higher unemployment, and reluctance to invest,
• Sustainable – we speak of it when a country’s economic conditions are either approaching or already in a state of equilibrium. A state of equilibrium is considered to be, for example, the balance of supply and demand and the achievement of comprehensive economic development, including agriculture, services, tourism, infrastructure, etc,
• Unsustainable – this is the opposite situation to the above, the value of GDP is increasing, but in individual sectors, there is no uniform development.

What are the limits of economic growth?

A high GDP per capita is generally desirable, as it indicates a prosperous economy and society. However, it is not easy to achieve and maintain such a level, as there are many barriers and constraints to economic growth. They are as follows:

• Unfavorable demographics, such as an aging population. If a country has more people of post-working age and fewer people of pre-working age, the level of goods and services produced will be negatively affected,
• The political system and inappropriate decisions made by those in power can slow the growth of GDP,
• Pollution – today we are obliged as a society to take care of our environment. Increased production always involves the exploitation of natural resources, which should be limited. This in turn can lead to a declining growth trend. We should also mention non-renewable resources (oil, natural gas, precious metals, etc.), which are of great economic importance. As they become scarcer, the dynamics of economic growth is threatened.
• Unequal income of the population – mostly better earnings do not extend to the general population, only to a selected part of it. Unequal distribution of income can eventually begin to reflect in declining consumption and, paradoxically, sometimes lead to the deterioration of people’s material situation.

What is an economic miracle?

Very rapid and strong economic growth is sometimes informally called an economic miracle. It happens very quickly and unexpectedly. Below are some examples of countries that have experienced this phenomenon in their history.

Examples of economic miracles

• Japan

After World War II, Japan achieved economic growth of nearly 10%, which was described as an economic miracle. U.S. efforts to industrialize, decentralize the economy, and increase exports helped improve the living conditions of the people there. The reason for this was the fear that otherwise Japanese society would move to the side of the Soviet Union.

Groups of entrepreneurs, known as keiretsu, who decided to work together to improve the industry also played an important role. Technological progress and an increase in employment helped companies operate more efficiently and raise their incomes, which boosted the GDP index. The Japanese economy is now one of the most dynamic in the world.

• Germany

Germany had price controls in place before World War II began, and trade in certain goods was restricted as early as 1939. This was a common practice in countries under totalitarian rule, such as Nazi Germany. Such measures were not beneficial to society and eventually led to food shortages, inflation, and a decline in the production of goods and services. The situation changed after the war ended and the country was divided into West Germany and East Germany.

In the western part of the country, repressive policies were abandoned – currency reform was introduced, price controls were removed, and taxes were reduced, which resulted in significant economic growth. The recovery was evident in the increased availability of consumer goods. People became more willing to spend money and production increased (four times within six months of the introduction of the currency reform), which stimulated the entire market.

Summary

High economic growth has many good outcomes that affect the economy and our daily lives. But it can be difficult to maintain it steady so that we can get the most benefits without damaging our environment or some sectors of the economy.

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