Growth means getting bigger. It refers to an expansion in the size of an organ or business firm. Growth could be defined as an increase in output. This implies the quantity of output per unit input.
John Friedman in his book defines growth as an expansion of the system in one or more dimension without a change in its structure while development is an innovative process leading to the structural transformation of the social system.
Economic growth, therefore, could be defined as an increase in the major macroeconomic variables i.e. the gross domestic product (GDP) with employment undergoing some positive changes for an appreciable period. In other words, economic growth relates to a quantitatively sustained increase in the countries per capita income and volume of trade. The size of a firm can be measured by different indicators, such as:
- Workforce on payroll
- Amount of plant installed
- Market share
- Size of share
- Space occupied by productive facilities
- Level of production
- The volume of turnover etc.
Change in any or all of this would give us a clue as to whether the business is expanding or not.
Business can expand either through internal or external ways.
Internal Expansion: This is also known as natural growth, firms expand by its own merit and effort by making more profit and re-investing part of the profit to expand production facilities, increase production level, etc.
External expansion: This happens through amalgamation and mergers
Reasons for seeking
- Success firms tend to grow because they have been reasonably successful in reaching the objectives they have set themselves, hence they tend to increase/maximize sales and/or profits.
- Economics of scales: large firms enjoy economies of scale which may be out of reach of the smaller firms.
- Investment funds: Large firms have access to investment funds than smaller firms. A loan is easier to collect and shares can be sold to increase funds.
- Fear: when managers of firm threatened that they (the firm and themselves) would be either eliminated or reduced if they were small, hence they tend to expand in order to eliminate the fear.
- Reduce risk: risk is reduced because of the possibility of diversification large enterprises.
- Research: it enhances the prospect of research as a large firm can perform certain types of research best.
- Management skill: large firms have access to skilled executives, which are scarce, then the smaller firms.
- Profitability: as firms grow, it enjoys economies of scale, which translate into lower cost. Also, the firm may be able to sell more of its products which result in higher sales.
Benefit of growth
Growth and living standard
For those who share in it, growth is powerful; weapon against poverty. A family that is 2,500,000 today can expect an income of about 3,050,000 within ten years if it shares in a 2 percent growth rate, 3,700,000 if that is 4 percent. The transformation of the lif-style of ordinary workers in various countries over the last centuries in the result of massive improvement in living standard and the quality of life that growth makes possible.
Growth and lifestyle
A family often finds that a big increase in its incomes can lead to a major change in the pattern of its consumption, that extra money buys importance amenities of life. In the same way, a consumption pattern as their average income rises. Not only do market in that growing rapidly make it profitable to produce more cars, but also the government is led to construct more roads and provide more recreational areas for its newly affluent and mobile citizens. Such amenities usually become matters of social concern only when growth has ensured the provision of the basic requirements for food, clothing, and housing of the substantial majority of the population. More subtle but in long term more important, are the effects of technological changes on the whole nation life-style.
Cost of growth
Other things being equal, most people would probably regard a fast rate of growth as preferable to a slow one, but other things are seldom equal. In a world of scarcity, almost nothing is free. Growth requires a heavy investment of resources in capital goods, as well as in activities such as education. Often these investments yield no immediate return in terms of goods and services for consumption, thus, they imply that sacrifice has to be made by the current generation of consumers.
The social and personal cost of growth
A growing economy is changing the economy. Innovation renders some machines obsolete and also leaves some people partly obsolete. No matter how well-trained workers are at age 25, in another twenty-five years many will find that they are at least partly obsolete. A rapid growth rate requires rapid adjustment, which can cause much upset and misery to the people who are affected by them. It is often argued that the cost of this kind is a small price to pay for the aggregate, these personnel costs are very unevenly borne. Indeed, many of those whose growth is most costly share least in the fruits that growth brings. Growth creates new jobs and destroys old jobs
Determination of growth
Important determination of growth of total output labor for growth: in the long term we can associate labor force growth with population growth (although in the short term the labor force can grow in participation if participation rates rise, even though the population remains constant). As more labor is used, there will be more output and consequently, growth in the total gross domestic product (GDP). The law of diminishing returns tells us that sooner or later each further units of labor to be employes will cause a smaller and smaller addition to gross domestic product (GDP). Eventually, not only will the marginal product of labor be falling, but the average product will fall as well.
Beyond that point, although economic growth continues in the sense that total output is growing, living standards are falling in the sense that average gross domestic product (GDP) per head of population is falling, if we are interested in the growth in living standards, we are concerned with increasing gross domestic product (GDP) person.