Economic Growth in Africa
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This essay discusses the role of investments and exports on continued economic growth in Africa. This is important as Africa currently has some of the fastest growing economies in the world, and the sustaining of economic growth through investing and exporting plays an important role. The issue was addressed using African economic growth data and the AE/Y, AD/AS models to explain how increases in injection components help sustain economic growth. The conclusions drawn by this essay show how using the multiplier effect through increasing investment and exports is necessary for economic growth in developing countries, and in addition, these African countries must work together and strengthen Africas economy to help themselves.
The African continent currently has more of the worlds fastest growing economies than any other; this can be seen by looking at the recent 2000 – 2009 period where 11 countries in Africa had an annual growth rate of 7% or higher (Business Times, 2011). An economic growth rate of this calibre is enough to double a countries economy in as little as ten years, but this is not an easy task for countries to achieve. The use of investing and exporting plays a vital role in gaining as well as maintaining a successful and continued economic growth rate.
The content of this essay addresses the matter of economic growth in Africa, placing a focus on the roles of investing and exporting, and how these aspects are important for this growth.
Economic growth is defined by Parkin et al. (2010: 442) as the expansion of an economys production possibilities, and is measured by the increase in real gross domestic product. Investments and exports are considered injection components and are therefore important factors in regards to economic growth, as an increase in either results in an increase of a countrys real GDP.
Investments and exports play a big role in maintaining continued economic growth within a country. Many African countries rely on these two components of gross domestic product more than most other international countries; this is due to the lack of money within these African countries to increase their GDP through other methods such as consumption and government spending (The Economist, 2010). African countries need to take advantage of these injection components by using the multiplier effect and aiming to increase exports and investments. An increase in these components will bring money into the country and increase the real GDP, the same money that has now been brought in can be used for consumption and government spending which will increase GDP again, this is an example of the multiplier effect.
For a lot of African countries, to achieve continued economic growth an increase in foreign investment is almost vital. Investment causes an increase in aggregate expenditure, which in turn causes an increase in GDP (Parkin et al., 2010: 665). The following AE/Y Keynesian and AD/AS models display a long run increase in aggregate expenditure caused by an increase in investment:
With a starting position at point A, an increase in investment causes an upwards shift of the aggregate expenditure curve to point B, and an increase in aggregate demand from AD0 to AD1, this increase in AE occurs directly from the investments. According to Parkin et al. (2010: 668) if there were no increase in price level in the short-run, the economy would move to point B, but an increase in price level would cause the economy to move to point C in the short run instead. The now higher price level causes a slight decrease in AE and the economy has now reached short-run equilibrium at point C.
In the long-run, real GDP has now become higher