Economic growth doesn’t necessarily lead to an increase in exports, although it often does. I don’t fully understand the last question.

What determines export growth?

1. Demand from other Countries. Demand for UK exports, will depend on the rate of economic growth in other countries. The UK’s main export targets are EU countries. Therefore, if there was growth in the Eurozone we would expect an increased demand for UK exports. A recession would cause a fall in demand for UK exports.

• Note: UK exports do not depend on UK domestic demand.

2. UK Competitiveness. If the UK can boost general competitiveness and productivity then UK exports will become more competitive and should increase.

3. Exchange Rate. A depreciation in the Exchange rate should make UK exports more competitive and should increase demand. The exact effect of a depreciation depends on the elasticity of demand for exports.

Does an Increase in Economic Growth Cause increased Exports?

Often countries may experience export led growth. For example, China’s strong rate of growth is primarily caused by the strength of the Chinese manufacturing sector. In this case it is exports that are increasing economic growth, rather than the other way around.

However, Economic Growth Could increase exports. In a period of economic growth, firms have more money to invest. This investment could increase the long run productivity of the economy and therefore, could help boost exports. In a recession, firms will be more reluctant to invest and therefore, there will be a slower growth in exports.

In theory it is also possible Economic Growth could harm exports. This is because high growth could cause inflationary pressures making UK exports less competitive. Also higher growth may lead to higher interest rates. Higher interest rates could cause an appreciation in the exchange rate which makes exports less competitive.

Conclusion

There is not a perfect correlation between economic growth and exports. It also depends on the country. Some countries have exports as a major contributory factor in causing growth. Some countries like Japan have strong exports but low rates of growth. Other countries in the past like the UK, US have had strong growth, with pretty poor exports. Growth has been demand led, resulting in current account deficits.

Readers Question: How does the size of a country effect the economic growth rate?

The two largest countries, (in terms of population) are China and India.

By coincidence China and India have the two highest rates of economic growth in the world. (China about 10.9%, India 7.0%)

However, this does not prove that populous countries will always have the highest rate of growth. For example, if we went back to the 1960s, it was likely China had a negative growth rate during the disastrous ‘great leap forward’ of Mao where upto 20 million died of starvation. One reason why China and India have a fast growth rate is that there is a lot of ‘catching up’ to do. e.g China’s old state owned industries were very inefficient and at the moment there are many potential efficiency gains.

The number of people in a country is not important, the key issues is how the economy is organised and whether a countries natural resources are utilised.

In a sense, China’s high population is helping the countries economic growth. There are so many Chinese workers willing to work for low wages, the labour supply curve is almost perfectly elastic; this has enabled Chinese exports to remain very competitive.

Richest Countries and the Size of A Country

Another interesting question to ask is whether the richest countries in terms of GDP per Capita have high populations?

1. Luxembourg … $56,380
2. Norway … $51,810
3. Switzerland … $49,600
4. United States … $41,440
5. Denmark … $40,750
6. Iceland … $37,920
7. Japan … $37,050
8. Sweden … $35,840
9. Ireland … $34,310
10. United Kingdom … $33,630

From the table we can see that, with the exception of United States and Japan, it tends to be small countries who dominate.

Readers Question: undertake an evaluation of what governments can learn from economic theory about raising their economys long term growth rate

The long term growth rate depends upon the underlying trend rate of economic growth rate. This underlying trend rate of growth depends primarily on the growth of Aggregate Supply and productivity.

To increase the long term growth rate, Aggregate Demand plays a very limited role. In the Classical model of economic growth, an increase in AD would only cause inflation. However, you could argue that AD does have a role to play.

If an economy experiences a recession for a long time, the average long run growth rate will be lower. This is related to the theory of hysteresis. What has happened in the past is likely to happen in the future. Thus, if governments can manage aggregate demand, they can prevent recessions and help increase the average growth rate.

Theories of Growth

Neo Classical Theory.

The neo classical theory of economic growth suggests that increasing Capital leads to diminishing returns. Therefore, increasing capital has only a temporary and limited impact on increasing the economic growth. As capital increases the economy maintains its steady state rate of economic growth.

Basically, to increase the growth it is necessary to increase labour productivity, the size of the workforce or improve technology. In other words economic growth requires an increase in all aspects of growth.

This model was first suggested by Robert Solow over 45 years ago.

Adam Smith and Wealth of Nations

advocated laissez faire free markets. Argued greater use of specialisation and division of labour could lead to higher growth rates. Criticised for ignoring market failure. Also free trade can be criticised for working against developing countries who struggle to diversify

New Economic Growth Theories (endogenous growth)

They place greater importance on the need for governments to actively encourage technological innovation. They argue in the free market classical view, firms may have no incentive to invest in new technologies because they will struggle to benefit in competitive markets.

• Place emphasis on increasing both capital and labour productivity.
• They argue that increasing labour productivity does not have diminishing returns, but, may have increasing returns
• They argue that increasing capital does not necessarily lead to diminishing returns as Solow predicts. They say it is more complicated, it depends on the type of capital investment.
• These theories associated with Paul Romer

Savings Ratio and Investment 

Some growth theories place large emphasis on increasing domestic savings. Savings provide the necessary funds to finance investment. It is this investment which creates further growth. This has been an important factor behind the economic growth in Asia.

However, it depends on how efficient the investment is. If savings is too high it leads to lower growth because people cannot afford to consume.

Economic Growth for Developing Countries 

Other theories have been suggested for developing countries. Amartya Sen and Joseph Stiglitz.

The Malthus Predictions

It is argued that economic growth may have limitations caused by lack of raw materials, climate change and overcrowding. Givern the failure of T.Malthus predictions to come true, these theories are often rubbished. Nevertheless, there may come a time when growth is constrained by environmental factors.