By linking international test scores across countries, a direct measure of quality is developed, and this proves to have a strong and robust influence on growth.
Further, the estimated growth effects of improved labor force quality are very robust to the precise specification of the regressions. The use of measures of quality significantly improves the predictions of growth rates, particularly at the high and low ends of the distribution.
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The importance of quality implies a policy dilemma, because production function estimates indicate that simple resource approaches to improving cognitive skills appear generally ineffective. Development of the American Economy.
Economic Fluctuations and Growth. International Finance and Macroeconomics. International Trade and Investment. Changes, or turning points, in the level of national income can be predicted and confirmed using economic indicators. Changes in these indicate that GDP is likely to change in 12 to 18 months time. A short leading indicator can be used to monitor changes in consumer credit and new car registrations. A lagging indicator monitors changes in unemployment and real investment and confirms that the turning point has occurred.
All indicators help policy makers decide when to implement a policy and by what degree. Economic growth is associated with a number of material benefits which increase economic welfare. These include the following:. A rise in real national income means that wages and profits are likely to rise. Assuming a stable population, this will raise GDP per capita.
A growing economy means that the public sector can receive more tax revenue and more resources can be allocated to public and merit goods, such as more roads, hospitals and schools. Public and merit goods generate considerable external benefits. More hospitals and schools mean a healthier and better-educated population, which generates other economic benefits in terms of the effectiveness of the labour force, and increases in long-term aggregate supply. Growth is clearly likely to stimulate demand for labour, and it is likely that more people will be employed and fewer unemployed.
As production and consumption increase, negative externalities , such as pollution and congestion, are likely to arise. There is also the likelihood of increased depletion of non-renewable resources, such as fossil fuels.
The quality of growth (English) | The World Bank
Too rapid a rate of growth can also lead to two significant economic problems: inflationary pressure and a balance of payments deficit , as imports rise to satisfy an increasingly active household sector. Growth can also widen the distribution of income, because some groups may benefit much more than others. Certainly in the UK, the relative income gap has widened during the growth years of to There are several limitations of using GDP statistics for comparing changes in economic well-being over time , including:. Average GDP per capita may rise over time, but the distribution of income may widen.
For example, a rise in the mean average income per head can be misleading because the average may rise because just a few of the population increase their personal income. Indeed, the mean average can rise, but the median , the mid-point in a range of numbers, can fall.
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People may be working longer hours, in which case some of the growth may be through increased work, rather than through increased efficiency. Prices are unlikely to remain constant over time, so GDP figures must be converted to at constant prices and measured from a base year.
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For example, more driving raises GDP, but also adds to CO 2 emissions, which can reduce the quality of life. Over time the quality of products tends to increase, so a given amount of income per capita in may purchase a higher quality product than it did in This is certainly true with high-technology consumer products, like PCs, laptops and mobile phones.
Although two countries may have similar GDP per capita figures, the distribution of income in each country may be very different. As when comparing a country over time, the number of hours worked to generate a given level of income may be quite different. International prices will also vary. This is significant because an individual's purchasing power is based on price in relation to income.
To solve this problem, GDP statistics can be re-calculated in terms of purchasing power. The purchasing power of a currency refers to the quantity of the currency needed to purchase a given unit of a good, or common basket of goods and services.
By Daniel F. Runde
Purchasing power is clearly determined by the relative cost of living and inflation rates in different countries. Achieving purchasing power parity means equalising the purchasing power of two currencies by taking into account cost of living and inflation differences. For example, if we simply convert GDP in Japan to US dollars using market exchange rates, relative purchasing power is not taken into account, and the validity of the comparison is weakened. By adjusting rates to take into account local purchasing power differences, known as PPP adjusted exchange rates, international comparisons are more valid.
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The true value of public goods and merit goods, such as defence, education and transport infrastructure is largely unknown. This means that it is difficult to compare two countries with very different levels of spending on these goods and assets. Similarly, the existence of a large unofficial economy may make comparisons based on official GDP very misleading.
While all countries have unofficial economies, their size and significance can vary considerably.
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