The relationship between economic growth and employment

Economic growth is the single most important macroeconomic variable. It can be defined as the rate at which the real national product of a country’s economy has grown during a specific time period. The higher this rate of growth, the better is this rate of growth for the general prospects for industries during the forthcoming months or years.

There are three indicators that measures the economic activity:

1. Gross Domestic Product (GDP)
2. Gross National Product (GNP)
3. Net Domestic Product (NDP)

Gross Domestic Product (GDP)

The gross domestic product is computed based on the contributions made by three sectors of the economy:

1. Agriculture
2. Industry
3. Services

The GDP represents the money value of all the final goods and services produces in a country during a given time period specifically one year. India’s GDP includes the profits of a foreign firm located in India even if they are remitted to the firm’s parent company in another country.

Gross National Product (GNP)

GNP is the total of incomes earned by residents of a country, regardless of where the assets are located. India’s GNP includes profits from India-owned business located in other countries. These incomes also includes direct investments income, portfolio investment income, and other investment income such as interest income.

Net Domestic Product (NDP)

NDP is obtained by deducting depreciation from current year’s GDP. These are capital consumption used up in the production process due to wear and tear, accidental damage, obsolesce or retirement of capital assets.

Relationship between the three measures:

GDP + Net income from abroad (rent, interest, profits & dividends) = GNP

GNP – Capital consumption (depreciation) = NDP

Output

The output measure of GDP is obtained by combining value added by all business such as agriculture, mining, manufacturing and services.

Expenditure

The expenditure measure of GDP is obtained by adding up all spending:

Government Consumption (spending on infrastructure, defence, education, welfare)

+

Private Consumption (spending on items such as food, clothing, cars, durables)

+

Investment (spending on houses, factories and so on)

= Total Domestic Expenditure

+

Exports of goods and services (foreigners spending)

= Total Final Expenditure

Imports of goods and services (spending abroad)

= Gross Domestic Product

Income

The income measure of GDP is based on total incomes from production. It’s a total of:

1. Wages and salaries of employees
2. Income from self-employment
3. Profits of companies
4. Profits of government corporations and enterprises
5. Income from rents

These are known as factor incomes. GDP does not include transfer payments such as interest and dividends, pensions and other social security benefits.

Growth Trends and Cycles

Trend is the long-term rate of economic expansion, whereas cycles reflects short-term fluctuations around the trend. There are always a few months or years when growth is above trend followed by a period when economy contracts or grows below trend.

In the long run the growth in economic output depends on the number of people working and output per worker known as productivity.

Firms employ people to make goods and provide services. This gives households their incomes. Household spending provides leads to existence of firms. Therefore,

Output = Income = Expenditure

There are also leakages in the flow. Money is taken out of circulation when people buys imports, save or pay taxes. This means less spending, so firms sell fewer goods and services.

Money is put into circulation when people run down their savings or borrow, when government spend their taxes and when foreigners by exports. These actions boost spending, so firms sell more goods and services.

All leakages and injections affect spending power and influence savings and investments decisions. They are thought to cause cyclical variations while productivity determines long-term growth.

Economic growth and employment relationship

In terms of GDP India is the 7^th largest economy in the world, with GDP at $2.26 trillion. However, India is the world’s second fastest growing economy with an average growth rate of 7%.

India is a densely populated economy with a population of 1,299 million people but with a low GDP per capita income of $1,861 per month nearing Rs 12,000 on average.

The real (constant price) GDP must grow at least as fast as the population if living standards are not to fall.

Employment

The level of production depends on the number of people employed, hours worked, education, training and quality of capital equipment.

The active population are the number of people employed and self-employed plus those unemployed but are ready and able to work.

Employment and un-employment are highly cyclical. As demand increase, companies hire workers and unemployment decreases. When demand increases, companies first tend to increase overtime. They tend to take more employees only when higher demand is perceived to be strong and durable. When there is no more labour available, demand bubbles over into inflation or imports. When demand turns down, hours are cut before jobs.