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Political Economy

Economic Growth

Economic Problems

Fiscal Policy

Perhaps the most obvious economic goal for a nation-state is economic growth, or an increase in the total value of the country’s economy. Nation-states strive for economic growth to increase the standard of living for their citizens and to gain more power in the world market. When growth is slow or when the economy actually shrinks in size, leaders often face strong criticism and greater opposition.

Gross Domestic Product

Gross domestic product (GDP) is the measure of the total amount of all economic transactions within a state. An increase in GDP leads to economic growth. Because economic growth means that the country as a whole is richer, it makes sense that a government will seek to increase the nation’s GDP.

GDP is frequently measured per capita, as the amount of GDP for each person. To calculate per capita GDP, divide the total GDP by the number of people in the country. Countries have widely different population sizes, so comparing their GDPs is not all that helpful. Economists and political scientists do, however, compare per capita GDP to get an idea of the relative wealth or poverty among different countries.

Per capita GDP varies widely around the world. The following table shows some examples of global GDP. As the table illustrates, in industrialized countries, per capita GDP can be more than $30,000 a year, but in very poor countries, per capita GDP is sometimes less than $1,000.

 
GDPs Around the World in 2009

Nation

GDP per Capita (approximate)

United States $46,400
United Kingdom $35,400
Germany $34,200
Israel $28,400
Mexico $13,200
Iran $12,900
China $6,500
El Salvador $6,000
Vietnam $2,900
Nigeria $2,400
Malawi $900

Income Distribution

Another sign of economic growth relates to income distribution, or how the wealth of a country is divided up. In most societies, in the present as well as in the past, just a few people possess great wealth, whereas most people are poor. Many modern democracies work to distribute wealth more equally through a variety of means, including welfare. But even in some democracies, including the United States, the richest people have far more money than the poorest.

Equity

Equity occurs when an economic transaction is fair to all those involved. Although not the same as equal income distribution, equity is an important part of a fair economy.

Most governments have laws and policies designed to ensure equity. Without such policies, many people would not engage in economic activity.

Measuring Income Distribution

Measuring income distribution is difficult. Simply measuring the average (mean) income can be misleading because extremes on either end skew the results. Nevertheless, analysts measure the median income to get a more accurate assessment of how the typical citizen fares because exactly one-half of people are below the median and one-half are above. Another way to measure income distribution is to examine wealth in quintiles (groups of 20 percent). For example, analysts might compare the amount of money owned by the richest 20 percent of the population with the amount of money owned by the poorest 20 percent.

Economic Inequality

Scholars hotly debate how much economic inequality is desirable. Some argue that a competitive economic market by necessity brings inequality, and thus some inequality among people is normal and natural. Giving hard workers and creative entrepreneurs more money than other people gives everyone the incentive to keep starting businesses and generating additional forms of wealth. But many scholars claim that economic inequality is dangerous because it divides society into classes that view one another with suspicion and hostility. The United States tends to allow for more inequality than other industrialized democracies.

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