Engines of economic growth Essay

Economic growth refers to an increase in the amount of goods and services that an economy can produce over a specified period of time. Percentage increase in real domestic product is conventionally used to measure economic growth. In order to net out inflation effects on prices of goods and services, growth is measured in inflation adjusted terms or simply real terms. Typically, economic growth means an increase in potential output, a situation where there is full employment due to growth in observed output or aggregate demand (Kennedy, 1990, 34). Engines of economic growth refer to variables or elements that determine the level of economic growth, either propelling it forward or backwards. Normally, such variables are geared at improving the status of economy but not slaging it. However, because of the challenging economic conditions all over the world, many economies are observed to experience depressions and booms respectively to the conditions of the economy. The economy therefore does not assume a straight line but a curve with minima and maxima and sometimes flat shapes. Therefore, engines of economic growth manipulate the path of the economy, as they are also manipulated by the market state (Collins, 2000, 20). One of the engines of economic growth is the level of investments. For capital goods to be accumulated and facilitate the production of greater volume of consumer goods in time to come, certain percentage of consumer goods should be given up in the current time. Accumulations for the future period can only be achieved through sacrifices of the present time. Increase in the quantity of capital goods is called investments. In the economy, many goods and assets undergo depreciation day in day out. Depreciation may be due to use or as age of the assets increase. Investments are made to cancel out such depreciations and other unanticipated costs that may come up in the process of economic operations. Depreciation is occasionally defined as the monetary value by which machineries and equipments become obsolete or wear out during the year. For stability of the economy, the level of investments should be kept greater than the level of depreciation (Scott, 1991, 45). The greater the investments above depreciation, the higher the potential output of the economy in future. Investments are not only made to bring efficiency and increase production in future, but also to serve as a security tool for the economy. This is because today’s economic arena is filled with many risks and uncertainties, which if not well taken care of can devastate an economy. Market area is characterized by innovations in all fields of production including the nature and types of commodities, the level of technology, international standards and requirements and change in customers’ tastes and preferences. As a result, any economy which does not respond to these dynamics can easily be overhauled. However, for economies with sound investments, any challenge that comes by the way can easily be countered. Resources used from investment must therefore come from postponement of today’s decision to consume to the future as illustrated below (Moore, 1998, 43). Consumption Investments 0 C B The diagram describes that economies with high rates of consumption in the current period, will have little investments for the future. This is shown by PPF CC and. An economy that restricts consumption today will have an expanded ability to produce in the future and therefore will be able to move to a higher consumption point (A), operating at PPF BB. This means that investments are determined by the rate of savings of an economy (Rostow, 1960, 10). The analysis depicts that savings should be high for growth in gross domestic product to be achieved. Prosperous economies have ever subjected their citizens to compulsory savings through the government, because without savings, investments can not be realized. The government can do this through increased and enforced taxation (Scheers, 1999, 30). Currently, the mostly pronounced engines for economic growth are innovation and entrepreneurship. The notion that these two aspects can spur economic growth is based on several research works from both developed and developing economies around the world. National priorities have of late encompassed entrepreneurship, innovation and knowledge at firm, regional, national and international levels. Attention towards these variables has been driven by the complexity of the change process and the multilevel and multivariable nature of the world economic competition. In the theory of entrepreneurship, entrepreneurs are seen as economic agents who may either operate within or outside firms but pay attention to economic happenings at all levels. These agents consistently seek for information from different economic settings, apply the spillovers of that knowledge and ultimately create innovative results through creation of new firms and enterprises. Entrepreneurial capital is determined by the degree of the presence of economic systems and entrepreneurial activities. Entrepreneurial capital serves as an important component for economic growth to be actualized. Apart from human capital, financial capital and knowledge capital, entrepreneurial capital has been proved to play greater role compared to knowledge capital (Mclindon, 1996, 51). Innovation refers to the process of creative thinking after which new techniques, products, formulations, markets, designs and ideas are brought forth into an economy. It is this process that takes place before entrepreneurship, because it is carried out by entrepreneurs. Innovators act as watch dogs for the economy. An economy undergoes consecutive reformations because it is influenced by national, regional and interregional factors. It is therefore advisable for any economy to make close observations of what new is coming up in the economy. For economic growth to be sound, ignorance of the outside reforms lags the economy behind. Entrepreneurs enable the economy to realize and respond to new products in the market. Goods and services are undergoing improvements in the way they are packaged, manufactured, blended, distributed and labeled. This slow response to the above aspects may render an economy of a country uncompetitive. Innovation still can call up the economy in times of technological progression in the production channel (North, 1996, 21). Currently, the world is talking about developed economies and developing economies, of which the big difference is the level of response to technology of the concerned economies. Production of commodities has to be as efficient and effective as possible to minimize costs and time. The western world is using high technologies in production and trading activities that have not yet been realized by the rest of the world, or even if the third world has recognized them, they may not have the capability to implement them. As a result, their economies are propelled forward to extremes that the rest of the world runs after with a lot of limitations. Therefore, the ability to realize arising opportunities and utilize them immediately and efficiently has propelled these economies to far ends. It is true saying that economies without entrepreneurs, innovators and discoverers are being exploited by such individuals from developed world. After considering this kind of analysis, it will be significant to state that economic growth is directly related to the level of innovation and entrepreneurship in a nation (Osterfeld, 1992, 14).