What best explains our current economy? Assignment Help
1. Review Critical Thinking Process.
2. Write a 2- to 3-page business brief summarizing your conclusions regarding slow economic growth in advanced economies.
3. Provide past or present examples on slow economic growth, cause and effect.
4. Incorporate factors such as interest rate, demand, supply, technology, oil prices, and many others by using economical expressions to illustrate your understanding of macroeconomics.
5. Provide examples on countries using expansionary monitory model and contractionary monitory models in advance economy and why was it used.
6. You may compare advanced countries like US, Germany, UK France to be illustrate your understanding.
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Economic growth can be defined as the increment in the value of the goods and services produced in the economy over a period of time and as compared form one year to another. The economic growth is often expressed in terms of a percentage increase in the GDP over the last period analyzed and higher economic growth points towards higher pace of growth and sustainability of growth on the part of the economy. A growing and healthy economy is expected to possess higher GDP growth.
Factors and causes of economic growth
The long term growth of an economy is generally believed to be causes by the following factors:
a) Productivity growth :
The productivity growth is defined as the ratio of the output to the factor inputs and if the factor productivity increases m the same lowers the input costs on an average basis and led to general increase in overall GDP and sustainable growth (Weil, 2014).
b) Changes in Demographics:
The positive changes in the demographic helps in increasing GDP by increasing the population to employment ratio. Higher the no of people in the labor force can effectively lead to higher output and influence creation of higher employment opportunities and Sustain the long term growth through increase in AD.
c) Labor force participation:
A higher and increasing labor force participation rate can increase productivity and GDP. Size of the economy can grow quite fast if the size of the labor force is changed from year to year. Particularly the younger the population, the higher would be the size of the labor force participation and higher growth can be achieved.
Slow Economic Growth in Advanced Economies.
Growth of GDP in the case of most of the advanced economies has dropped to alarming low rates and the situation is not going to improve soon. While global growth is Estimated to be 3% approx., the same for most of the advanced economies would be 2% approx. And the growth rate is expected to be lower in the next 2-3 years and a drastic recovery is probably not expected. Causes of slowdown in the developed nations is discussed as follows:
a) Slowing domestic and external demand
b) Increasing costs of borrowing
c) Uncertainties about policies followed by governments across developed nations
d) Trade embargoes and tariff implementations and roadblocks in trading between most nations.
It is important for the central banks like FED which has pursued a policy of inflation-targeting in the recent past to distinguish between the cyclical and long-term structural factors while deciding the long term monetary policies . Potential output depends on the state of technology available, the inflation and interest rates and capital investments. If there are cyclical disturbances which leads to lower GDP than potential GDP, then the central banks needs to reduce the interest rates for making sure demand for capital and investment remains higher and move towards potential GDP. This has happened in the case of US FED which has continuously kept the interest rates lower at 2-2.5% in the last 4-5 quarters but the same is quite higher when compared to pre-2008 level. In most of the other developed nations like Germany and UK, the rate of borrowing has gone up since 2008 and that has caused a dip in the level of new investments. Creation of new employment and Aggregate demand has reduced and which has not helped in the overall growth of these economies (Bade, 2011).
There are several cyclical factors which ahs caused economies like UK, German, and US to make slow recoveries and the same are:
a) The financial sectors of the economies has so far not fully recovered from the financial crisis and yet to attain critical success level achieved by these sector prior to 2008.
b) There has bene a general reduction in accessibility to cheap credit facilities by investors.
c) The financial markets are too fragmented and flow of capital is hindered
d) A general lack of policy certainty has led to stagnation of financial activities (collander, 2010).
Howeve, the barriers to long term growth are expected to be reduced in the next few years and a s result of which the advanced economies are excepted to grow higher in the next few years.
Monetary policy of advanced economies in the current scenario
The US FED has been following a general expansionary monetary policy which is progressive in nature and it has been keeping the interest rates lower and stimulating the economy to create higher AD and keep inflation down. UK is also following a similar strategy but the problem has beeen accentuated by the uncertainties surrounding the Brexit. Germany has been known to have followed a more sedate monetary policy in the recent years. The general trend in these economies is to keep the inflation down to 2% approx., keep interest rates at a moderate level and create investment demand. However, there are different cyclical uncertainties affecting these economies (Besanko, 2012) over the last few years.
The main drivers of long run economic growth being higher productivity and greater innovation and both of these factors have declined for most of the advanced economies. Higher productivity has now been achieved by developing nations such as India and they have been able to bring in higher innovative technology as well which allowed these new economies to keep the costs down and increase efficiency. The rising income levels in the advanced nations which has long been the drivers of aggregate demand has remained stagnated and as a result of which the growth of domestic demand has remained stagnant in these countries. As labor is costly, cost of the manufacturing activities are outsourced and the same has benefitted the developing nations more than the advanced nations and helped the developing nations grow faster.
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