Economic growth is likely to be one of the most prominent and lively discussed terms in the media. The question arises more and more often whether economic growth is unlimited or has reached its limits. Economic growth began with the industrial revolution and has been at the core of economic policy since World War II. How is economic growth measured, which factors speak for it and which against it?
- Economic growth is reflected by the gross domestic product of an economy.
- It provides information on how stable a country’s prosperity is.
- The criticism of unlimited economic growth due to the ecological effects is growing louder.
Determination of economic growth
Put simply, the indicator for economic growth expresses the monetary development of production and services in a country or region. The so-called gross domestic product shows whether an economy has grown or shrunk.
According to digopaul, the nominal economic growth only measures the price development, but does not depend on whether only the prices have increased or also the actual performance behind it.
Real economic growth adjusts the gross domestic product for the inflation rate in the observation period. This ensures that the actual numbers are used for comparison.
Another option is to calculate the absolute versus the relative growth. When comparing the absolute economic growth, the absolute numbers are compared, for example an increase of 500 euros per capita. The relative economic growth quantifies the percentage increase. Despite an increase in the absolute numbers, the relative values can turn out to be declining on an annual comparison.
The economic growth of a country provides information about the extent to which this country is able to guarantee its citizens continuous prosperity. In this case, prosperity does not mean consumption, but represents education and infrastructure.
Steady and appropriate economic growth
Too rapid increase in economic growth would overheating of the economy mean. This is usually followed by a massive economic downturn. The aim of economic policy is therefore to achieve steady and appropriate economic growth. This is controllable and allows more predictions for future developments. Based on these forecasts, corrective measures can be implemented more easily in order to avoid an extreme in one direction or the other.
Economic growth is one of the four cornerstones of the magic square, the area of tension in which economic policy moves.
These cornerstones are:
- high employment figures
- Price stability
- external balance
- steady, reasonable growth of the economy
The four cornerstones contradict each other. High employment means high disposable income in the population. This creates increased demand, which in turn fuels inflation . If one of the cornerstones is imbalanced, the relevant institutions must correct it. As a rule, this causes another cornerstone to sway.
Economic growth – pros and cons
On the one hand, adequate economic growth is necessary to secure the prosperity of a society. On the other hand, growth means that something is “always more”. In order to achieve economic growth, all areas of an economy must be included. The climate discussion is a good example of how good economic growth is. Increasing production figures mean increasing energy requirements. Almost everyone has now realized that the increasing demand for energy is one of the triggers for global warming. The great challenge of our time is to ensure economic growth while at the same time being climate neutral.
Unlimited economic growth could fail because, on the one hand, natural resources are limited or do not grow back at the same rate as they are consumed. On the other hand, the natural absorption capacity of ecosystems is limited.
The answer to the question of what plastic waste in the oceans has to do with economic growth is obvious. Growth also means growth in consumer goods and thus an increase in packaging waste. It doesn’t matter whether it’s the plastic bags from the fruit stand or the foil from the new washing machine.
The problem with economic growth lies in the fact that supporters assume that this is the only way to keep a modern society stable. You see the reverse of growth in mass unemployment, which in turn destabilizes social structures.
Criticism of growth is getting louder and louder
It is undisputed that the criticism of the unchecked economic growth and the resulting consequences is steadily increasing. The criticism of capitalism that has prevailed since Karl Marx has recently been joined by voices that fundamentally question the economic systems. Critics argue that a point has been reached where further growth is no longer possible. In addition, it is difficult to decouple natural resources from production processes. An example of this is the need for water in the extraction of rare earths or in the agricultural industry. On the other hand, the climate-friendly drive of an e-car is offset by the environmentally harmful extraction of the raw materials necessary for the drive. Even Germany had to find out in 2018 that
The question of whether economic growth remains the key to success or a curse rather than a blessing will continue to fuel the discussion.