Economic Growth

Economics influences every aspects of our lives. For individuals, good economics means higher quality of life, higher education and better health care. For businesses, good economics signifies more profits and more working opportunities for workers. For a country, good economics implies good balance of outputs and inputs, high real GDP without inflation and full employment. So how to increase national economy is the most significant issue.

The rate of economic growth measures the annual % increase in real GDP. In the short term, in order to achieve economic growth, the government can use monetary and fiscal policy to increase AD (aggregate demand) according to AD=C (consumption) + I (investment) + G (government expenditure) + X (exports) - M (imports). Also in the long term it is necessary to shift the LRAS (long run aggregate supply) to the right (diagram 1.1) to reduce the inflation, and which can be achieved through supply side policies.

However the economic growth may also bring some disadvantages like environmental damage, inflation and balance of payments. This essay is going to discuss monetary, fiscal policies and some supply side policies issued by the UK government to increase the rate of economic growth, and analyze the strength and shortages of these approaches.

First of all, in order to achieve economic growth, the government can use following monetary policy:

Lower interest rates:

Which mean people will get a smaller return from saving. And these lower rates will encourage individuals to spend their money rather than hold onto money.

Lower interest rates also mean cheaper borrowing costs. So more and more enterprise are likely to borrow loans from bank to invest and spend.

Reduce in interest rates will also increase asset prices. It is more attractive for people to buy assets like housing or land, etc because of low interest rates. So this will lead to rising house price and therefore an increase in personal property. And increased property will also stimulate consumers to spend their money as consumers' confidence is higher.

The three points above reflect that individuals and businesses are more willing to spend money with lower interest rates. Therefore, the national GDP will enjoy this process then country can provide more jobs and the unemployment rate decrease. However, in additional to the growth of AD, the lower interest rates also have a lot of problems. For instance, it will lead to an increase in real GDP as well as inflation rate. As you can see in the AD/AS diagram (1.2), the price level rise with the process of AD1 shift to AD2. Secondly, for those people who live on their savings such as retired people and the old. Lower interest rates is not a good news for them. Because of the low interest rates, theses people will be given less return from their saving so they will spend less probably.

The economic downturn reflects on the rate of unemployment. In recent years the unemployment rate in UK keeps up due to the great recession in Europe. Now this situation begin to take a turn for the better thanks to the UK government issued some relevant monetary policies. For example, Bank of England decided to keep interest rates at 0.5% and it will not rise until the unemployment rate reduces below 7%. (BBC news, 7th Nov 2013)

Secondly, fiscal policy also affect AD greatly like changing tax rates. Income tax can be adjusted in many ways, such as following points:

The tax free allowance, which means before income earners start paying taxes, they are allowed to receive amount of income. Therefore, in order to increase AD, the tax free allowance could be increased to give consumers more disposable money. For example, the personal tax free allowance in the UK for 2011-2012 was ₤7,475. Now personal allowance is ₤9,440, increased ₤1,965 compared to the previous number. (GOV UK, 14th Nov,2013)

The number of tax bands. This means that tax rate is different among various income groups-high income people need to pay more taxes than low income group. For instance, in 2013 to 2014 tax years. 0- ₤32,010 of taxable income from savings is taxed at 20%. Between ₤32,011- ₤150,000 will be taxed at 40%. People who earning over ₤150,000 are taxed 50% (GOV UK, 14th Nov,2013). Advantages of implementing these fiscal policies is obvious that reasonable change tax can help regulate AD. And tax band is able to reduce the income gap between poor and wealthy people.

However, it can