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Economic Growth - Long Term and Short Term Growth

  • Ashesh Anand
  • Nov 15, 2021
Economic Growth - Long Term and Short Term Growth title banner

What Is Economic Growth?


Economic growth is defined as a rise in the generation of economic goods and services from one time period to the next. It can be calculated in nominal or real (inflation-adjusted) terms. 


Although other metrics are occasionally employed, aggregate economic growth is traditionally assessed in terms of gross national product (GNP) or gross domestic product (GDP).


(Must Read: Differences between Classical and Neoclassical Economics )


Economic Growth: An Overview


In its most basic form, economic growth refers to an increase in an economy's total output. Aggregate production gains are frequently, but not always, associated with higher average marginal productivity. 


As a result, salaries rise, encouraging consumers to open their wallets and spend more, resulting in a higher material quality of life or standard of living. 


Physical capital, human capital, labor force, and technology are all often used to model growth in economics. Simply said, increasing the number or quality of working-age people, the tools they have at their disposal, and the recipes they have for combining labor, capital, and raw materials will result in higher economic output.


(Also Read: Introduction to Gross Domestic Product (GDP) )


Economic growth can be achieved in a variety of ways. 


  1. The first is a rise in the economy's stock of physical capital items. Increasing the amount of capital in the economy tends to boost labor productivity. Workers can create greater output per time period with newer, better, and more tools. 


A fisherman with a net, for example, will catch more fish per hour than a fisherman with a pointed pole. However, there are two factors that are crucial to this procedure. 


Someone in the economy must first save (give up present consumption) in order to free up resources for the creation of new capital, and the new capital must be of the right sort, in the right place, at the appropriate time for employees to use it productively.


  1. Technological advancement is a second means of generating economic growth. The creation of gasoline fuel is an example of this; prior to the discovery of gasoline's energy-generating capacity, the economic value of petroleum was very low. 


Gasoline became a more efficient and cost-effective way of transporting products in production and distributing finished commodities. Improved technology enables workers to create more output with the same amount of capital goods by combining them in more productive ways. 


Because savings and investment are required to engage in research and development, the pace of technological growth is heavily dependent on the rate of savings and investment, just as it is for capital growth.


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  1. Expanding the labor force is another approach to boost economic growth. When all other factors are held constant, more workers produce more economic goods and services. A large infusion of cheap, productive immigrant labor contributed to the United States' vigorous economic growth in the nineteenth century. 


There are, however, some crucial requirements to this process, just as there are for capital-driven growth. Increasing the labor force inevitably increases the quantity of production that must be consumed to pay for the new workers' basic subsistence, thus the new workers must be productive enough to offset this and not be net consumers. 


In order to achieve their productive potential, the correct type of employees must flow to the right positions in the right locales in combination with the right types of complementary capital products, just as it does with capital additions.


(Also Read: Capital in Economics - Characteristics, Types, and Functions )


  1. Increases in human capital are the final method. This means that laborers improve their craft abilities and productivity through skill training, trial, and error, or just more practice. The most consistent and readily managed ways are savings, investment, and specialization. 


In this context, human capital can also refer to social and institutional capital; behavioral tendencies toward greater social trust and reciprocity, as well as political or economic innovations such as improved property rights protections, are all examples of human capital that can boost the economy's productivity.



Long-Term Growth


Economic growth is the increase in the market value of an economy's commodities and services over time. The percentage rate change in real gross domestic product is used to calculate it (GDP). 


Long-run growth is described as an economy's ability to create more products and services over time. In addition to pricing and supply and demand, a country's GDP is intimately linked to population growth.


(Must Read: Difference between Micro and Macro Economics )


Watch this: Long-Run Economic Growth

Determinant factors of Long-Run Growth


There are several factors that influence an economy's long-term growth:


  • Growth of productivity


Productivity growth is defined as the ratio of economic outputs to inputs (capital, labor, energy, materials, and services). When productivity rises, the cost of commodities decreases. Lowering the price of a product or service increases demand for it. Increased demand might result in increased revenue.



  • Demographic changes


Changes in demographics have an impact on economic growth by altering the employment-to-population ratio. The quantity and quality of available natural resources are among the factors. The population's age structure has an impact on employment and long-term growth.


(Also Read: Types of Elasticity in Economics )


  • Labor force participation


Economic growth is influenced by labor force participation and the number of economic sectors. The labor force participation rate is the percentage of workers who are willing to work. Because of low birth and mortality rates, labor force participation is high in nations with significant growth and industrialization.


Long-Term Growth and Aggregate Production


A firm's long-run expansion can affect the size of operations by adjusting the level of fixed inputs, which moves the production function upward when plotted against the variable input. Aggregate production functions investigate a firm's or economy's short-run inputs and outputs. The findings allow for modifications that increase long-term growth by balancing inputs and outputs.

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Short-Term Growth


Short-term growth investments, also known as marketable securities or temporary investments, are financial assets that can be converted to cash quickly, usually within five years. After only 3-12 months, many short-term investments are sold or turned to cash. 


CDs, money market accounts, high-yield savings accounts, government bonds, and Treasury bills are all examples of short-term investments. These investments are usually high-quality, liquid assets or investment vehicles. 


Short-term investments can also refer to financial assets owned by a firm, which are comparable to short-term investments but have a few additional conditions.


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Short-term investments are investments made by a firm that are expected to be converted into cash within one year and are recorded in a separate account and included in the part of the current assets of the corporate balance sheet.


How Short-Term Investments Work?


A short-term investment's purpose, for both firms and individual or institutional investors, is to protect capital while simultaneously earning a return comparable to a Treasury bill index fund or another comparable benchmark.


A short-term investments account will be seen on the balance sheet of companies with a strong cash position. As a result, the corporation can invest extra funds in stocks, bonds, or cash equivalents to earn a better rate of return than a traditional savings account. 


A corporation must meet two basic criteria in order to define an investment as short-term. It must first be liquid, such as a stock traded often on a large market or US Treasury bonds. Second, management must intend to sell the security in a short time frame, such as 12 months. 


Short-term investments include marketable debt securities, commonly known as "short-term paper," that mature in a year or less, such as US Treasury bills and commercial paper.


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To designate an investment as short-term, a corporation must meet two essential characteristics. It must, first and foremost, be liquid, such as a stock traded often on a large market or U.S. Treasury bonds. 


Second, management must intend to sell the security in a short period of time, such as 12 months. Short-term investments include U.S. Treasury bills and commercial paper, as well as marketable debt securities, dubbed "short-term paper," that mature in a year or less.


Watch this: Warren Buffett's Five Tips For Long-Term Investing | CNBC


Bottom Line


Individual investors and organizations searching for both liquid and stable ways to develop their wealth can consider short-term investments. There are numerous options available, ranging from CDs to bonds to high-yield savings accounts. It is up to each individual to complete their due diligence. 


Despite the fact that LTG fund investors are instructed to expect a good average return over several years, fewer patient investors are able to exit unless the fund has a lock-up period, which is commonly found in hedge or private funds. 


If a typical LTG fund has too many disappointing years, investors would flee in search of higher market returns. This may compel a fund to reduce its holdings before the market value of the equities catches up with their fundamental value.

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