What does growth mean

Growth term explanation and definition

From a business point of view, growth is understood to mean the increase in gross domestic product, or GDP for short. This increases the income from goods or services. It is always determined from one economic period to the next whether there has been growth.

The business perspective

A distinction is made here between nominal and real GDP growth. In the case of nominal growth, value is created via the level of market prices. The changes in these lead to inflation or deflation, that is, an increase or a decrease in GDP. Under real growth, price increases are already measured after adjustment. So it is a real measurement of the performance development within an economy. The term extensive growth describes the increase in GDP. It ignores whether the supply of goods to the population per capita has remained the same or whether it has increased. Intense economic growth is only spoken of when per capita income actually rises. In this case, labor productivity is increased. This means that GDP is increasing more than the rate of growth within the population. For the purpose of delimitation, economic growth is usually given as a percentage of the previous year.

Qualitative growth

The qualitative growth describes the increase in the national product. This is accompanied by an increase in overall social prosperity. The qualitative growth is also referred to as environmentally friendly growth. Here, growth is achieved without harming the environment. This can be achieved, for example, by using renewable energies. Qualitative growth is based on the principle of sustainability.

Quantitative growth

With quantitative growth, the national product is increased without taking the social or natural environment into account. Quantitative growth satisfies increased demand and brings with it an increase in the employment rate.

Work as a growth factor

An increase in employment leads to an increase in the number of workers and employees who produce the goods. In contrast to the increase in demand, however, the increase in employment takes place within very narrow limits and also very slowly. In Africa, for example, the population is growing by around 3% every year. This increase in the population results in an increased demand. However, it can hardly be ensured here that residents have the appropriate qualifications to increase productivity. Therefore, in some countries there are birth controls, which are intended to ensure that the quality of life of the existing population is assured. In China, for example, this is enforced through the one-child rule.

Capital as a growth factor

In an economy, capital is the potential that is needed to produce goods and services. Machines and buildings are counted as capital. But human capital also plays a crucial role. The production per employee increases at the same rate as capital intensity, however, depending on the marginal returns of capital. This means that the higher the production rate, the lower the yield and thus also the potential for growth. Capital can be accumulated. However, it wears out and needs to be replaced at regular intervals. Therefore, a certain proportion of production must always flow into investments. This is the only way to guarantee long-term production. In the production of an economy there is therefore a theoretical limit to what it can produce. When the investments have reached the same level as the depreciation, the steady state point is reached. However, this point is also influenced by the savings rate. The higher this is, the more existing capital can theoretically be replaced. The increase in the savings rate reduces consumption. Ideally, the savings rate is 50%. In such a case, as much money is saved as is spent on consumption. In the Solow model, this savings rate of 50% is called the golden rule.

Technology as a growth factor

Technical progress is the contribution to growth that is not due to the increase in labor or capital. Technological progress can be both new products and improved production processes. But the development of new resources and new organizational structures are also referred to as technical progress. In Germany, between 2 and 3 percent of GDP is spent on research and development. Similar values ​​are achieved in the USA, Japan, France and Great Britain. These investments allow newer and better products to be developed, which may increase the productivity of employees. The production of an economy can increase with technological advances even in a steady state.

Economic growth as the main goal in economic policy

State economic policy sees economic growth as one of its main goals. In Germany, economic growth is part of the “magic square”. This was recorded in the Stability and Growth Act in 11967. In addition to the low unemployment rate, the stability of the price level and the external balance, economic growth is anchored in Section 1 of the Stability Act. Here, steady economic growth is understood to mean that even short-term economic fluctuations should be avoided if possible. In the event of a recession, government intervention can come into play to weaken it. If there is a boom phase, budget consolidation can limit growth.

The importance of economic growth in Germany

Most economists see economic growth as a necessity. Only through growth can an increase in the number of unemployed be avoided, and if demand continues, there will be an increase in employment and consequently a decrease in the number of unemployed. In this context, economic growth is often discussed in terms of the employment threshold. The employment threshold is an indicator of the growth from which new jobs will be created. However, due to rationalization there are redundancies. In order to compensate for this downsizing, economic growth must occur. However, the supply of jobs must remain stable so that new jobs are required as the economy grows. These assumptions are due to Okun's law. The relationship between unemployment and economic growth was empirically investigated by Arthur Melvin Okun. In Germany, the employment threshold was for a long time at an economic growth rate of around two percent. In 2005 it fell to around one percent. However, this means that Germany is still above the EU average. Within the EU, productivity growth was around 0.5 percent. However, most economists assume that the Hartz reforms will lead to a lowering of the employment threshold. This reform makes it probable that unattractive job offers accepted by the population will continue to be carried out in the future. In the 1990s, the economic rebound led to an economic recovery and growth without any new job creation. This is referred to as jobless growth, i.e. growth without employment growth or jobless recovery, the recovery of the economy without the creation of new jobs. There are various explanatory models for this. Some of them rely on factors like automation. Due to the higher level of technology, there can be an increase in production without new employees having to be hired. The work is automated, i.e. more and more machines are used instead of human labor. But increasing the productivity of the existing employees can also lead to economic growth without job growth. In Germany, however, the extension of working hours is also a much discussed topic. More work is being done here, but this extra work is being absorbed by the same employees who were already employed before growth. Therefore, with possible interpretations in relation to the reduction in the number of unemployed with existing economic growth, changes in the methods of employing the unemployed and attempts to define unemployment must always be discussed. Otherwise, no satisfactory result can be achieved.

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