An Analysis of Economic Growth for Major Advanced Economies

Introduction

Positive economic growth, low unemployment, and sustainable inflation are experienced in a successful economy, and in such an economy, there are low interest rates based on this success. The central bank affects the economy with its decisions on the interest rate. Specifically, the central bank encourages the economy by increasing the amount of money in the market, and this increased amount of money decreases the interest rate. Low interest rates increase expenditures on consumption and investment. As a result, unemployment decreases, and economic growth emerges. The value of companies increases in a market with economic growth. However, the risk of inflation also increases in a live economy. In this situation, the central bank decreases the amount of money and increases interest rates. The decrease in the amount of money results in a decrease in inflation and slows the economy's recession. Within this framework, the central bank applies a balanced policy depending on developments seen in the market.

However, interest rates do not change in the real world solely in response to the changes in monetary policy. There is a linear relationship between interest rates and inflation, and the direction of this relationship is from inflation towards interest rates because inflation is one of the factors of the nominal interest rate; other components include the real risk-free rate, the default risk premium, the liquidity premium, and the maturity risk premium. The maturity risk premium consists of the interest rate risk and the reinvestment rate risk. Therefore, inflation should first be low to have a low interest rate. In addition, interest rates could also be determined using bargaining between the party with surplus funds and the party in need of funds. This also prevents open low interest rates in the budget deficit and the balance of payments. Consequently, interest rates cannot explain economic growth alone; there are many contributing factors.

Mishkin (2004: 412-414) establishes a relationship between economic growth and its contributing factors, asserting that companies are likely to invest in capital equipment to increase economic growth and efficiency when unemployment is low. Price stability is necessary because a rising price level (inflation) causes uncertainty in the economy, preventing economic growth. A change in currencies changes the competitive advantage in international trade. The countries that are more dependent on foreign trade are more affected by the volatility experienced in currencies. Stability in foreign trade positively affects economic growth. When these aims come together, investment is easy, and real economic growth is ensured. Economic growth is, conceptually, an increase in the output in time. The economic growth model used in this study was formed based on this relationship. The aim of the study was an analysis of economic growth for major advanced economies (the G7). The determination of the factors affecting economic growth is extremely important in terms of the wealth of the societies. Within this circle, account balance, employment, inflation, and investment were used as the factors of economic growth (gross domestic product). This study is at the forefront of research in this field when considered in this respect.

Literature Review

When literature is examined, it may be seen that there are many studies on economic growth, and the results of these studies are summarized in Table 1. From the literature review, two significant results were obtained: first. There was no study with major advanced economies (G7) as the basis; second, the economic growth model used in this study was used for the first time.