Chapter 39, Problem 1FRQ

To determine

To find: Actions to be taken by the government to promote long-run economic growth

Explanation of Solution

To improve long-run economic growth, the government uses expansionary fiscal policies such as increasing fiscal spending on infrastructure, physical and human growth, and research and development.

The following are the major five steps taken by the government to improve long-run economic growth:

1. An increase in spending on infrastructures such as roads, ports, railways, warehouses, and other storage facilities to support the various market activities will promote economic growth in the long run. These infrastructures will improve the better connectivity between the forward and backward linkages in the economy.
2. An increase in the spending on human capital such as better education and health facilities will promote economic growth in the long run. For example, an improvement in educational facilities (such as providing courses according to the market demand for workers, opening training institutions, and so on) will help in reducing structural unemployment in the economy which helps in getting long-term sustainable economic growth.
3. An improvement in technological advancement by spending more on research and development will enhance the capacity of firms and industries to produce in long term and thus results in a higher production level in an economy.
4. By reducing the political and licensing hurdles faced by firms during their expansion and growth processes, the government can promote long-term economic growth.
5. Easing the tax procedures, promoting the tax benefits such as ‘Tax Holidays’ and schemes like ‘Production-Linked Incentives’, and opening more SEZs (Special Economic Zones) will promote economic growth in the long run.

Economics Concept Introduction

An increase in the aggregate production of goods and services in an economy over time is considered economic growth. Economic growth is a quantitative measurement as it represents growth in numerical form in terms of GDP or National income.