What is the difference between economic growth and economic fluctuations

Thus this stage is known as the recovery stage. With the development in business, the unemployment rate of the country also decreases gradually. Also during this time, business houses again start generating income from trading. Government of many countries try to take many steps in order to control the business cycle so that the businesses will suffer less.

The central bank plays a major role in controlling the business cycle by introducing contractionary or expansionary credit policies. A government should cut the taxes and try to spend more in order to control the business cycle. The main objective of the government should be to increase the effective demand for some products and services by increasing the buying power of the people with new policies.

The government should take more taxes during prosperity time and try to spend less. All these cyclical fluctuations are due to the capitalist economy. We can avoid the cyclical fluctuations if we shift our economy from capitalist to socialist. By shifting these, the business houses will no longer have the main objective of earning more and more profit but despite they will be more interested in giving back to society through their different operations.

From to , there were eight recessions; since , there have been only two. Of course, the complement of less frequent recessions is longer expansions.

Since World War II, there have been three very long expansions, occurring in the s lasting months , s 92 months , and s months, the historical record. The current expansion, which began in November , may eventually turn out to be a long one as well—through June , it was already the fourth longest since World War II.

The pattern of longer expansions and less frequent recessions that has prevailed since the s expansion has been dubbed the "great moderation" by economists.

Research has demonstrated statistically that there has been a fundamental change in the economy's behavior since the mids. Not only has the business cycle been smoother, random fluctuations in growth have also been smaller since then.

Economists have three hypotheses for what has caused the great moderation: a change in the structure of the economy; better policy, notably monetary policy; or simply better luck. Expectations play an important role in the business cycle, and people's expectations are not always rational.

John Maynard Keynes described the cause as "animal spirits," or people's tendency to let emotions, particularly swings from excessive optimism to excessive pessimism, influence their economic actions. For example, businesses make investment decisions based on their projections of future rates of return, which will depend on future sales and so on. These inherently uncertain projections change as current conditions change. If businesses believe economic conditions will be unfavorable in the future, they will not make investments today, reducing the growth rate of GDP from what it otherwise would have been.

Likewise, households may postpone purchases of durable goods or housing if economic conditions look unfavorable. People's projections of the future may be overly influenced by the present or recent past. A shock refers to any sharp and sudden change in economic circumstances on the demand or supply side of the economy that disrupts the steady flow of economic activity. A well known example are energy shocks: when the price of energy suddenly rises, it disrupts both production, because energy is an important input to the production process, and consumer demand, because energy products account for a sizeable portion of consumer purchases.

A sudden change in expectations that affects consumer or investment spending can also be thought of as a shock to aggregate demand. Since these shocks are typically unpredictable, the business cycle remains unavoidable.

Recessions are often attributed to periods when consumers decide to spend less, and recoveries to a revival in consumer spending.

As seen in Figure 2 , this view is not very accurate—consumption is actually one of the most stable components of spending. While its growth rate falls in recessions, its growth rate usually stays positive and always falls by less than overall GDP growth, which suggests that causation typically runs from growth to consumption.

Fixed investment is actually the most volatile component of spending. Business inventories are another component of GDP that play an important role in the business cycles. A buildup in inventories may result from lower sales than businesses had expected. When this occurs, businesses may have to "work off" the inventory buildup before they begin to produce again, thereby prolonging a downturn.

If businesses have become more adept at managing inventories thanks to "just in time" inventory management, it may help to explain why recent recessions have been briefer and shallower. The trade balance is typically counter-cyclical helps soften the business cycle , all else equal. Representing the gap between saving and investment, the trade deficit would be expected to decline in a recession since investment would be expected to fall as a share of output.

Thought of differently, the trade deficit would also be expected to decline since the growth consumption of imports would fall as overall consumption growth fell. Less foreign capital would be attracted to the United States, causing the dollar to fall and exports to rise. In the recession, the trade deficit fell, but in the most recent recession , it rose contrary to what theory predicted. However, national saving did not rise in the recession, as theory predicted—it fell more rapidly than investment.

The largest cause of the fall in national saving at the time was the increase in the federal budget deficit. Policymakers, the media, and citizens focus much of their attention on business cycle issues—questions such as, "Will the economy enter a recession? But the economy is self-equilibrating over time—a recession will eventually give way to an expansion, regardless of what policy option is selected although some policy choices will help end a recession faster than others.

Long-term growth is often neglected by comparison, yet sustained, permanent, widespread increases in living standards depend on long-term growth, not the business cycle. When reflecting on the differences in the average standard of living today compared to years ago or years ago, an argument can easily be made that long-term growth trumps short-term fluctuations in importance.

In a recession, boosting short-term growth is mainly a question of finding ways to stimulate overall spending so that the economy operates at its productive capacity. In the long run, concerns about matching the level of spending to the productive capacity of the economy are irrelevant because it will happen on its own.

Instead, long-term growth depends on increasing the economy's productive capacity. The economy's productive capacity can be boosted in only two ways—by boosting the economy's inputs or by using existing inputs more productively.

Inputs take the form of labor and physical capital investment in plant and equipment. Labor inputs increase when employment or hours worked increase. In the long run, increases in employment will depend primarily on population growth, although changes in employment patterns such as the entrance of women into the workforce can also be important at times. Higher long-term employment will lead to higher GDP, but not necessarily higher living standards because living standards are determined by per capita GDP.

If the worker-population ratio stays constant as the population increases, then the increase in the numerator GDP will be canceled out by the increase in the denominator population. Increases in employment can increase living standards only if the employment-population ratio increases, but this ratio is relatively stable in the long run since working age individuals have high and stable employment rates.

The coming decades could see a decline in the employment-population ratio caused by the aging of the population. Increases in the capital stock increase GDP because, to take the simplest example, a worker who has more equipment to use can produce more over a fixed time. Once an environment has been created where investment is profitable, the primary factor determining how quickly the capital stock can grow over time is the national saving rate—real resources are needed to finance capital investment, and these resources are only available to invest if they are saved rather than consumed.

National saving comes from three sources: households, businesses, and the government. When the government runs a budget deficit, it has a negative saving rate that reduces the resources available to finance investment spending. In recent years, national investment has greatly outstripped national saving, and the United States has had to borrow from foreigners to bridge the gap. The only way to borrow from foreigners is by running a trade deficit. As the saving rate has fallen, the trade deficit has risen, alleviating upward pressure on interest rates.

Since trade deficits in recent years have been large enough to increase foreign indebtedness faster than GDP is increasing, the current pattern, by definition, cannot persist indefinitely. At some point in the future, although there is no consensus how soon, the trade deficit will have to decline, either through a rise in national saving or a decline in investment.

As seen in Figure 3 , fixed investment spending as a share of GDP fell below its post-war average in the early s, but rose above average in the late s, contributing to the high GDP growth rates of that period. Beginning in the recession, investment spending declined as a share of GDP. It began rising again in , but has still not reached the levels of the late s. The case can be made, however, that when considering the effect of investment spending on GDP growth, residential investment housing construction should be omitted because it is not an input into the production process, and therefore does not increase future output.

If residential investment is omitted, then non-residential investment spending as a share of GDP shows little improvement since In other words, the recovery in investment spending since is being driven primarily by the housing boom, not business investment. Note: Fixed investment is the sum of residential investment and non-residential investment spending. Fixed investment excludes changes in inventories. Both labor and capital are subject to diminishing marginal returns, which means that as more capital or labor is added to production, GDP will increase less, all else equal.

In addition, there are natural limits to how much labor inputs both hours worked and the labor force participation rate can be increased, and the United States may already be operating close to those limits.

This implies that a long-term strategy to boost growth cannot rely solely on increasing inputs. Herein lies the importance of productivity growth. Even with a fixed amount of labor and capital, output can increase if inputs are used more productively.

Productivity increases can be caused by efficiency gains, better business practices, technological innovations, research and development, or increasing the training or education of the workforce. Economists often refer to the latter as an increase in "human capital," since education can be thought of as an investment in skills.

Its importance to productivity growth should not be underestimated since the creation and implementation of many technological innovations would not be possible without it. In the long run, productivity growth can be thought of as the main force driving increasing living standards. This statement becomes intuitive when thinking of the goods and services available to the typical American household today that did not exist for earlier generations. Capital investment causes the economy to grow faster than it would based on productivity growth alone, but capital investment without productivity growth would not lead to sustained growth.

Empirically, the measure that corresponds to the definition of productivity described here is referred to as total-factor productivity or multi-factor productivity. It cannot be measured directly since adjustments must first be made for changes in labor and capital inputs. Perhaps for this reason, labor productivity , which is measured by simply dividing output by hours worked, is a more popular and well-known measure. But because labor productivity can increase due to increases in the capital stock or efficiency gains, it does not correspond directly to the conceptual notion of productivity growth.

As seen in Table 2 , there was a significant acceleration in productivity growth in This acceleration reversed the productivity slowdown that lasted from to , bringing it closer to the growth rate of to Most economists believe that the information technology IT revolution has been responsible for the productivity growth rebound. There is more disagreement on whether the rebound will be permanent. Some economists argue that after the initial burst of innovation caused by greater processing power and the invention of the internet, further innovation will be limited and the productivity boom will fizzle out.

Other economists argue that the fruits of these technological breakthroughs will be longer lasting. That pattern did not hold in the periods from to or to , when multi-factor productivity growth was a smaller source of GDP growth in absolute and relative terms. CBO projects that multi-factor productivity will continue to be the most important source of GDP growth over the next ten years, as the growth rate of the labor supply continues to decline.

The post-World War II baby boom explains why labor supply growth increased in the s as the baby-boomers entered the workforce , and has decreased since as the baby-boomers have begun to retire. Because the growth in the labor supply is projected to decline further, CBO's projection that GDP growth over the next 10 years will remain relatively constant depends on the assumptions that strong multi-factor productivity growth will continue and growth in capital spending will revive.

Note: Table is measured in terms of potential growth in order to eliminate cyclical effects. Multi-factor productivity's relative contribution to rising living standards is even more important than the table indicates for two reasons.

First, much of the increase in capital is replacing rather than supplementing existing capital that has depreciated. Although replacement capital increases GDP which is not adjusted for depreciation , it does not raise living standards.

Only increases in the labor supply that exceed increases in population raise overall living standards, and most increases in the labor supply match population growth. Policymakers' influence over economic activity is limited. Avoiding recessions or demonstrably raising the economy's long-term growth rate are policy goals that have proven elusive.

Nevertheless, good or bad policies can make a difference at the margins, and even incrementally better performance can cumulate over time, so many policy improvements can have a low cost and high reward.

There is widespread consensus among economists that the prudent stabilization policymaking regime that has evolved since World War II is an important reason why the economy has become less cyclical and recessions have become shallower although better luck may have also played a role. The government has two tools at its disposal to moderate the short-term fluctuations of the business cycle—fiscal policy or monetary policy. Fiscal policy refers to changes in the budget deficit.

Life expectancy - Many factors affect the Life expectancy of people living in a certain region, like eating habits and the occurrence of war, pandemic or natural disasters. Pollution-level checks also determine the average life of the people.

The coronavirus pandemic is supposed to cause a decrease in Life expectancy by years. Adult literacy - According to WHO , It is the percentage of people who are aged 15 and above and can read and write a simple statement in their everyday life. As per the survey provided at Wikipedia , the global literacy rate for all people aged 15 and above is The global literacy rate for all males is GDP per capita - GDP is the most common way of measuring the standard of living as money reflects our lifestyle.

GDP per capita is found by measuring Gross Domestic Product in a year and dividing it by the population in the economy. Check also: Capital in Economics. Levels of infrastructure — e. For example, in recent years, economic development in parts of Africa and Asia have been improved due to increased investment in roads, railways and seaports. These upgrades in transportation and infrastructure determine that the flow of traffic remains smooth.

Thus, making people residing in such neighbourhoods happy. Now that we have established the basics of Economic growth and economic development. We shall move forward to differentiate between both of them. Recommended blog: Scope of Managerial Economic. Economic development is a broader concept than economic growth. The development reflects social and economic progress and requires economic growth.

Growth is a necessary condition for development, but alone it cannot guarantee development. Even in order to calculate the HDI we have to calculate the real GDP per capita so as to determine the standard of living, which is just a small ingredient in the recipe of HDI. Also, Economic development is considered to be a broader concept than economic growth because economic growth only takes monetary development into account whereas economic development requires social development and monetary development to go hand in hand.

Also read: Factors affecting PED. Economic development covers more ground than economic growth and that is why economic development is the one which takes more time and resources. This is why economic development can happen with economic growth but it is not necessary if economic growth is taking place then economic development will also happen. Economic growth can be termed as a subset of economic development. Economic growth is a uni-dimensional approach to the growth of a country whereas Economic development is a multi-dimensional approach to the growth of a country as it takes many significant conditions into play.

As it might be clear that Economic growth is a quantitative analysis and Economic development is a quantitative as well as qualitative analysis and can be conducted using various statistical data analysis techniques. His research interests center on macroeconomics and productivity analysis. Read summaries of presentations at the latest program meeting Read the latest Program Report Affiliated scholars. Program Co-Directors.