Block Type
Learn Block
Improving Economic Growth and Output
Many of you will have heard numerous political leaders discussing the need to prioritise economic growth. But what do they mean by this? And how might they set out to achieve higher economic growth? This section will explore the wide variety of routes that can be undertaken to improve economic output.
What might the government do to improve economic growth?
- Human Capital Investment - Human capital refers to the skills and ability that people possess. The government may seek to improve this by offering training or scholarship programmes.
- Physical Capital Investment - Physical capital is the physical resources used in the production of goods and services, such as machinery or vehicles.
- Infrastructural Investment - Infrastructure is the physical building blocks of society, including roads, bridges, hospitals and schools.
- Research and Development - The process of researching and creating new knowledge, products, or technologies through study and experimentation.
- Monetary Policy - The actions taken by the central bank to control money supply and interest rates to control inflation and growth.
- Fiscal Policy - This includes government actions relating to government spending and taxation which impact the economy.
How might the government improve economic growth and output?
Human Capital Investment
Human capital refers to the skills and ability that people in the economy possess. The government may seek to improve this by offering training or scholarship programmes. By improving the quality of human capital in the economy, the government aims to improve productivity and subsequently growth.
Human Capital Investment:
A recent way in which the Scottish Government is investing in human capital, is through their extensive apprenticeships scheme offered to young people. The government invests around £100 million every year on apprenticeship training, providing work experience and skills development. This investment both tackles youth unemployment, and can improve the quality of the labour force.
Do you want to learn more about the apprenticeships offered in Scotland? Follow the link below:
Physical Capital Investment
Physical Capital Investment: Physical capital is the physical resources used in the production of goods and services, such as machinery or vehicles. By improving the quality of physical capital in the economy, this is likely to increase growth/output and economic performance. The government may wish to encourage businesses to invest in physical capital and machinery to improve growth. One way which they can do this is by providing tax incentives in the form of tax breaks. By reducing the tax requirements of firms, costs decrease which may lead to investment in technology and other areas.
Infrastructural Investment
Infrastructure is the physical building blocks of society, including roads, schools and hospitals. The government may invest in infrastructure to allow for better flow of economic activity. For example, they may wish to build an enhanced road or rail network to create quicker transport for goods. Infrastructural investment is one example of capital spending, which we also review here in the Economic Futures Hub.
Infrastructural Investment: The Glasgow Commonwealth Games 2014:
Prior to 2014, the Scottish Government invested heavily in infrastructural projects to host the Commonwealth Games successfully. Various infrastructural projects such as the Emirates Arena, Sir Chris Hoy Velodrome, and the SSE Hydro were erected with a cost to the Scottish Government of around £425 million. While costly, the project was estimated to generate increased tourism, trade and employment opportunities. In fact, the Commonwealth Games are estimated to have generated around £740 million for Scotland’s economy.
If you want to learn more about the impact of the games on Scotland’s economic growth:
Research and Development (R&D)
Innovation, creating or implementing new things, is a key driver of improving economic output. The government can incentivise businesses to prioritise research and development which can foster innovation and development. Incentivising R&D can increase investment, create employment opportunities, improve global stature, and improve productivity. A combination of the above impacts can lead to long-term economic growth.
Monetary Policy
Within the Economic Futures Hub, we have explored the use of monetary policy, namely interest rates. One manner in which the central bank can encourage output, is by lowering the interest rates. As we have discussed, lower interest rates means that it becomes cheaper to borrow. Lowering interest rates is associated with increased investments, higher consumer spending and business growth, all which encourage higher economic output.
Fiscal Policy
Fiscal policy involves how the government manages spending and taxation to achieve higher economic output. There are two primary ways in which the government can promote economic growth: government spending and taxation. Firstly, the government may increase spending on schools to improve the long-term education quality and output. This will also create more jobs due to the need for construction, this is known as the secondary effect. Furthermore, the government may decrease taxation which subsequently increases disposable income and consumer spending. Increased spending resultantly promotes higher economic output.
The Fraser of Allander Institute recently published a report outlining the key international economic growth priorities for the Scottish Government, in the International Scotland report:
Growth and Standard of Living
GDP per capita, otherwise known as GDP per head, is one of the most widely used indicators of living standards globally. GDP per capita is simply determined by dividing overall GDP by the population of the country. As such, we can use GDP per capita changes to understand the changes in standards of living. For example, if GDP per capita in Scotland rises significantly, then we would expect that living standards in Scotland would rise accordingly.
GDP and Living Standards: The Debate!
Despite GDP per capita being widely used as the primary indicator of living standards worldwide, there is widespread debate about how effective it is at measuring standards. In this section, we will briefly outline the key criticisms of GDP as a living standard indicator.
Inequality: GDP per capita simply creates an average by dividing GDP equally between the population. This average may mask significant income inequalities in a nation. In nations where there is substantial income inequality, a high GDP per capita may be a misleading measure of the standard of living for the majority of the nation.
While there is a relationship between GDP per capita and income inequality, it is inaccurate to state that higher GDP per capita leads to a decrease in income inequality. This is particularly clear in nations such as the United States and the United Kingdom, where GDP per capita is high yet there is also high income inequality.
Environmental Concerns: It is often the case that higher economic growth correlates with higher emissions. Growth is often associated with increased production and consumption of services, which subsequently, increases the use of fossil fuels such as oil and gas. It is often the case that industry and factory use grows, leading to a rise in emissions. As high growth leads to higher pollution, many argue that it is unfair to indicate that high growth indicates rises in living standards.
The following graph displays GDP per capita and annual emissions in the United Arab Emirates. GDP per capita has increased significantly since 1975, yet annual emissions have also risen by around 650,000%! As skyrocketing emissions has damaging long-term impacts on the global climate, and humanity, is it accurate to suggest that rising GDP per capita leads to rising living standards when there is also rising pollution?
We can see in the above graph that GDP per capita decreased significantly between 2007-2008 during the financial crisis. Such a significant decrease does not necessarily mean living standards plummet in that timeframe.
If Scotland maximised oil mining in the North Sea, this would significantly increase GDP. However, this would also cause substantial environmental damage. Does this rise in GDP then really indicate higher living standards?
The Scottish Government has addressed the need for environmental sustainability to be considered when pursuing economic growth, creating the Wellbeing Economy Governments Group to build the economy while operating within safe environmental limits. Read more about the Wellbeing Economy Governments Group here:
Neglected Factors: GDP measures the monetary value of output in an economy. GDP does not account for social factors such as overall satisfaction/happiness and social cohesion, this is not its purpose. Both factors are of importance to overall standards of living in an economy.