Thu | Dec 13, 2018

Briefing | How to achieve economic growth

Published:Wednesday | January 10, 2018 | 12:00 AMDr Andre Haughton
If Jamaica produced 100,000 patties last year and produces 105,000 patties this year, assuming that in this basic example, patties are the only goods that Jamaica produces, then Jamaica’ GDP has grown by five per cent.
If Jamaica produced 100,000 patties last year and produces 105,000 patties this year, assuming that in this basic example, patties are the only goods that Jamaica produces, then Jamaica’ GDP has grown by five per cent.
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Every country wants to increase economic growth on a consistent basis, but many people are unaware of how economic growth is achieved.

Economic growth, in simple terms, is really an increase in the real value of what a country produces this year relative to last year.

For example, if Jamaica produced 100,000 patties last year and produces 105,000 patties this year, assuming that in this basic example, patties are the only goods that Jamaica produces, then Jamaica's gross domestic product (GDP) has grown by five per cent.

WHAT FACTORS MIGHT HAVE CAUSED THE INCREASE IN PRODUCTION?

This would have occurred through employing more labour, so unemployment falls; or it could be the case that the patty makers have become more efficient at their task, hence achieved an increase in productivity, or an increase in investment could have led to an increase in the amount of machinery employed, hence more output.

Either way, a production process was engaged. Growth did not occur through the buying and selling of the commodity, it occurred through increased production.

Similar to the market for patties, many countries produce many different goods. It is also important to note that an increase in production also causes an increase in supply, which causes a fall in prices, which increases the average real income and increases standard of living.

IS THE GROWTH SUSTAINABLE ON ITS OWN?

The growth outlined above is just a one-time occurrence. In order for the economy to grow by five per cent again next year, Jamaica must produce more than 110,000 patties and each successive year, continue to increase the amount of patties it produces. Meaning that, people must continue to become more efficient at patty making, or there must be increase investment to expand the operation so that more patties can be produced and more people employed.

Even if the inputs and machinery employed in making the patties are imported, the patties are produced locally, so it contributes to GDP.

Many Jamaicans want to see an increase in GDP but have the idea that growth can occur predominantly through buying from abroad and selling local without any actual value added.

WHAT RISKS ARE ASSOCIATED WITH ECONOMIC EXPANSION?

More buying and selling of patties occurred because more patties were produced.

If I interview 10 people with business ideas, three of them have business plans with elements of production of goods or providing a service, the remaining seven are strictly ideas to buy and sell with no value added.

A small island like Jamaica will never be able to produce everything for itself, but young aspiring entrepreneurs should begin to reorient their frame of mind towards businesses that produce some type of good or service.

The economy grows through foresight and understanding. Proper rural and urban planning support is also necessary to facilitate business. The economy operates in business cycles and the situation might arise where patty production cannot grow at a pace of five per cent per annum, for example. In this case, there must be some other product that can expand production.

Even the farmers, due to output volatility, are producing less of some goods than others. Long-term plans or measures must be put in place to minimise or mitigate risks associated with achieving their growth target.

- Dr Andre Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email editorial@gleanerjm.com