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Economic Growth Essay

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❶Firstly, the productive opportunities available within the existing resouirce and necessary known-how have to be utilised to the maximum extent through optimum allocation of the resources of the country. But countries like Britain and France have modernised their agriculture in spite of shortage of land and the country like Japan has developed a solid industrial base despite its deficiency in natural resources.

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It was affected by different social and political situations. Gross domestic product GDP the most important indicator of economic growth varied with different percentages over these two decades. Moreover, GDP started and continued to decrease as a result of Israeli military measures during the years of the second intifada Therefore, it can be said that Palestine, as an occupied small country, has a very fragile and sensitive political, economical and social situation due to the Israeli occupation.

Much attention should be paid to the Palestinian economy, in particular to the governmental policies used in order to analyze the reasons and effects of such a fragile economy on the other aspects of life.

This study uses the definition of economic growth as an increase in real GDP. Economic growth can be measured by comparing real GDP for different years. Government spending expenditure , which will be the main focus of the study, is the acquisition of goods and services either for current use, to directly satisfy individual or collective needs of the members or for future benefits such as infrastructure investment. It includes all government consumption and investment but excludes transfer payments made by a state Barro and Grilli, There have been several schools of thoughts regarding the impact of government expenditure on the economic growth.

The classical school viewed that countries with higher government expenditure would experience lower economic growth Ricardo, While the Keynesians viewed that the increase in government expenditure leads to higher economic growth Keynes, However, the neo- classical viewed that there is no long run impact of government expenditures on the economic growth rate Solow, Moreover, Economists of Endogenous Growth Theory such as Barro suggested that government expenditure induces economic growth.

There have been several studies interested in the impact of government expenditure on economic growth. For example, Mohammadi, Maleki and Gashti analyzed the effect of governmental expenditure composition on the Economic development of economic cooperation organization countries ECO: They focused on three types of government expenditures: The real per capita of GDP in period t was the dependent variable where real per capita of GDP in period t-1, government expenditure on health to GDP ratio in period t, government expenditure on education to GDP ratio in period t, government expenditure on defense to GDP ratio in period t, the investment in period t, total of Population growth rate, technological growth and the depreciation rate in period t and other financial variables as a share of GDP in period t formed the independent variables.

The dynamic panel data method, the generalized method of moments GMM and the Sargan test were conducted. The results showed that the health expenditure has significant and negative effect on growth, educational expenditure has significant and positive effect and the governmental defense expenditure has significant and positive effect on the economic development of ECO countries.

The dependent variable in this study was per capita GDP growth while the growth of per capita public health expenditure in the GDP, growth of per capita public spending on education in the GDP, population growth, growth of the share of total health expenditure in the GDP and the share of gross capital formation in the GDP formed the independent variables. Data for all variables were obtained from the World Development Indicators and Least square multiple regression analysis and t-test were used to estimate the specified model.

Results showed that the share of gross physical capital formation in the GDP is not significant, developing countries in which the government continues to increase per capita spending for health care and education relative to income are expected to grow faster and that the growth of the share of total health expenditure in the GDP also influences per capita GDP growth of countries included in this study.

Also, Yu, Fan and Saurkar assessed the impact of the composition of government spending on economic growth in 44 developing countries 44 developing countries The aggregate national GDP were used as the dependent variable while the explanatory variables included labor, gross capital stock, and capital stock of various government expenditures.

Results showed that the various types of government spending have different impact on economic growth. In Africa, government spending in human capital was particularly strong in promoting economic growth.

In Asia, capital, agriculture, and education expenditure promotes economic growth. In Latin America, none of the government spending items has any significant impact on economic growth.

The main question that will be answered: This will be achieved by answering the following sub-questions:. The main objective of the study will be to analyze the impact of government expenditures as a total and its components on the Palestinian economic growth. Moreover, the specific goals to be achieved are:. The Importance of the Study:. However, government expenditures and taxes are two tools of fiscal policies that can be used to achieve the desired economic growth in Palestine.

Government expenditures are more controlled by the Palestinian authorities, which give them the preference over the other instruments of fiscal policy in this study. Since part of the taxes are under the control of the Israeli authorities in certain circumstances and up to certain levels, the recommendations that will come out of this study will be more effective in the case of government expenditures rather than taxes.

This study will be directly addressed to the Palestinian policy makers, mainly the Ministry of Finance. This study will help the policy makers in the Ministry of Finance to take into their consideration the effect of the government expenditures on the economic growth when they formulate and create the Palestinian Authority budget. This will make the budget more effective and the Palestinian resources will be allocated in a more efficient and productive way.

This study will also be very helpful to the Ministry of Planning in setting up the social, economical, financial and political plans that would enhance the overall performance of the country in the previously mentioned fields. Since there is a direct relationship between GDP and unemployment rate, this fiscal policy instrument will be very helpful for Ministry of Labor in preparing its annual strategies in decreasing the unemployment rates.

In addition, this study will benefit the Ministry of National Economy in choosing the projects that should be given licenses, in particular, the ones that enhance the economy growth the most. In addition, this will help the individuals as being part of the labor force to determine how and where to invest their money so as to help in achieving better GDP growth. This study will be analyzing the impact of government expenditures as a total and its components on the economic growth in Palestine It will have an important limitation, which will be the shortness of the time series that will be taken in analyzing the impact of the government expenditures on the GDP.

The time series coverage will be since the Palestinian Authority was established in as a result of the Oslo Accords between the Palestine Liberation Organization and Israel. The study will be based on secondary annual data of total government expenditures and its components from the Ministry of Finance whereas the GDP, capital estimated using the ICOR approach and employment to be taken from the Palestinian Central Bureau of Statistics.

This study will be consisting of two models. The dependent variable of the first model will be the GDP whereas the independent variables will be capital, labor force, technology and total government expenditures Mohammadi, Maleki and Gashti As for the second model GDP will be the dependent variable while labor, capital, technology and the components of government expenditures will be the independent variables Bader, According to the Ministry of Finance government expenditures in Palestine are divided into four types; expenditures on wages and salaries, non- wage expenditures, net lending and development expenditures.

These four types will form the independent variables of the second model. The stationarity of the two models will be first tested using Augmented Dickey-Fuller and Phillips-Perron unit root test for stationarity.

Then the impact of government expenditures as a total and its components on the GDP will be examined using multiple regression analysis where the R2, F-test and t- test will be calculated. Wages and salaries expenditures. In fact, low per capita income is both the cause and the effect of poverty. At low levels of income, people cannot save much. Thus the circle is complete, as shown in Fig.

A country is poor because it was previously so poor that it could not save and invest. Or, as Jeffrey Sachs explains the poverty trap: In short, various obstacles to development are self-enforcing. Low levels of income prevent saving, retard capital growth, hinder productivity growth and keep income low. Successful development may require taking steps to break the chain at various points.

By contrast, as countries get richer they save more, creating a virtuous circle in which high sayings rates lead to faster growth. A country is rich because it was rich in the past. Or a rich country is likely to become richer in the future.

In addition, due to the narrow size of the domestic market for light consumer goods such as shoes, textiles, radio, etc. Lack of invest means low factor productivity and continued low income. A country is poor because it was so poor in the past that it could not provide the market to spur investment.

A major debate in the areas of development economics from the s through the s concerned balanced growth versus unbalanced growth. The term balanced growth has been used in different senses.

The meaning of the term may vary from the absurd requirement that all sectors grow at the same rate to the more sensible plan that a minimum attention has to be given to all major sectors—industry, agriculture, and services. The main advocate of the doctrine of balanced growth was Nurkse.

To him, balanced growth means the synchronized application of capital to a wide range of different industries. The advocates of the Nurkseian doctrine support the big push thesis, arguing that a strategy of gradualism is bound to fail.

A substantial effort is needed to overcome the inertia inherent in a stagnant economy. According to Paul N. Rosenstein-Rodan , the factors that contribute to economic growth—such as demand and investment in infrastructure—do not increase smoothly but are subject to sizable jumps or indivisibilities. These benefits spillover to society as a whole, or to some members of it, rather than to the investor concerned. This means that the social profitability of this investment exceeds its private profitability.

For Rosenstein-Rodan, a major indivisibility is in infrastructure, such as power, transport and communications. This basic social capital reduces costs to other industries.

Reducing interdependent risks increases the incentive to invest. Hirschman develops the idea of unbalanced investment to complement existing imbalances. In his view, deliberately unbalancing the economy, in line with a predesigned strategy, is the best path for economic growth. He argues that the big push theory cannot be applied to less developed countries LDCs because they do not have the skills needed to launch such a massive effort.

The scarcest resource in LDCs is the decision-making input, i. Economic development is held in check not by shortage of savings, but by that of risk-takers and decision-makers. He suggests that since physical resources and managerial skills and abilities are scarce in LDCs, a big push is sensible only in strategically selected industries within the economy. The reason is that the profitability of different investment projects may depend on the order in which they are undertaken.

However, if the car factory is set up first, its return is likely to be low due to shortage of steel. This means that society would be better off investing in the steel plant first and the car factory next, rather than making independent decisions based on the market. So planners and policy-makers need to consider the interdependence of one investment project with another so that they maximise overall social profitability.

They need to make that investment which promotes the maximum investment. Investment should be concentrated in those industries which have the strongest linkages—both backward to enterprises that sell inputs to the industry and forward to units that buy output from the industry. So there is need for making public investment in steel industry which has a strong investment potential in the sense that it is likely to spur private investment.

One main drawback of unbalanced growth approach is that it fails to stress the importance of agricultural investments. However, empirical studies indicate that agriculture has substantial linkages to other sectors. The truth is that there is no conflict between these two strategies of development. In some instances, imbalances may be essential for compensating for existing imbalances.

To some modern economists underdevelopment is result of coordination failure. This is why the theory of big push or critical minimum effort or balanced growth has been put forward. The coordination failure problem leads to multiple equilibria, as has been suggested by M. The basic point is that benefits an economic agent receives from taking an action depends positively on how many other agents are expected to take the same action or the extent of these actions.

For example, price a farmer can expect to receive for his output depends on the number of intermediaries who are active in channel of distribution which, in turn, depends on number of other farmers who specialise in the same product. Likewise, fertility decision need in effect to be coordinated across families.

All are better if average fertility rate declines. But any one family may be worse off by being only one to have fewer children. The reason is that in rural areas children are a source of labour power for agricultural families.

So if only one family adopts the small family norm it will have to hire workers from the external labour market by paying higher wages. This shape reflects typical nature of complementariness. If in this case one or a few agents take action, each agent may be isolated from others.

So spillovers may be minimum. Thus the curve YY does not rise quickly at first as more agents take the decision to invest. But after enough invest there may be a cumulative effect, in which most agents begin to provide external benefits to neighbouring agents and the curve rises at a much faster rate.

Finally, after most potential investors have been seriously affected and most important gains have been realised the curve starts to rise at a decreasing rate. Thus there is possibility of multiple equilibria. Of these D 1 and D 3 are stable equilibria. The reason is that if expectations were slightly changed to a little above or below these-levels economic agents investors would adjust their behaviour in such a way as to bring the economy back to equilibrium levels.

This is the hallmark of a stable equilibrium. The intermediate equilibrium at D 2 cuts YY function from below. So it is unstable. This is because if a few less entrepreneurs were expected to invest equilibrium would be D 1 and if a few more, equilibrium would shift to D 3.

Therefore, D 2 may be treated as chance equilibrium, i. Thus in practice we can think of an unstable equilibrium such as a D 2 as ways of dividing ranges of expectations over which a higher or lower stable equilibrium will hold sway. Thus there is need for coordinating investment decisions when the value rate of relation of one investment depends on the presence or the extent of other investments.

All are better off with more investors or higher rate of investment.


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Economic growth is what every economy tries to achieve for the good of everyone as a whole. Developing, producing more, increased wages, higher levels of.

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Free economic growth papers, essays, and research papers. Economic Growth Essay. Describe the influence of two contrasting economic environments on business activities within a selected organisation (P5) Economic growth Economic growth is a long-term expansion of a country’s productive potential, growth is the way the country’s economy increases over a course of time.

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Homework Question on Economic Growth in the USA Identify a research question from your professional life or research interests that could be addressed with multiple regression with two predictor variables. Describe the predictor variables. ADVERTISEMENTS: Here is a compilation of essays on ‘Economic Growth’ for class 9, 10, 11 and Find paragraphs, long and short essays on ‘Economic Growth’ especially written for school and college students. Essay on Economic Growth Essay Contents: Introduction to Economic Growth Adam Smith and Economic Growth The Classical Theory of Economic .