Many economic textbooks will attempt to answer the question, What risks does economic growth involve? Some will attempt to answer by discussing growth in the context of other variables such as inflation, demographics, international trade and balance of payments. Others will discuss growth in the context of specific industries or locations such as property values, demographics, land use efficiency or political stability. Still others will only address the question of what risks does economic growth involve. Often this last topic is the most important because it indicates where some of the greatest risks to economic growth lie.
One of the first questions that people ask when trying to understand what risks does economic growth require is whether economic policies are optimal. It is important for any policy to be considered a policy in light of its impact on economic policies, objectives and potential outcomes. For instance, a monetary policy might be considered optimal if it produces enough money to be lent out to businesses and individuals. Such a policy might be considered optimal if it prevents or eliminates deflation which causes money prices to fall. These are just a few of the issues that are discussed when discussing optimal economic policies.
While it is possible to look at each policy and determine its optimal use, such analysis rarely takes into consideration the unique characteristics of any economy. Economists have long debated the optimal interest rate level. One school of thought is that such a move would lower the risk of inflation. Another school of thought is that it would lower the risk of economic disaster. There are a number of arguments for and against such moves but it seems most experts agree that it is difficult to accurately determine which move would be best or worst.
One of the most fundamental questions anyone needs to ask themselves is what level of risk is optimal for any particular economic activity. The basic idea is that no economic activity should ever involve a risk of zero cost. Any activity that involves some degree of risk, however small, should be viewed with caution and analyzed in the same light as other risky investments. Economic policies that involve zero cost risks are called micro risks.
Anybody who follows economics will be aware of the concept of risk management. It refers to the use of policies to reduce the impact of any given investment. A prime example of a risk management policy in the business world would be the creation of a risk management plan, which details how and when certain types of business operations will take place. Without such plans any economic activity is subject to unforeseen risks.
In the case of economics, a risk to the business or economic system could be defined as a chance that either lowers the value of the entity involved or increases the risk of the entity in relation to other entities. For example, a farmer is concerned about a natural disaster that would wipe out his entire crop. In order to protect his assets, he creates a special policy that would allow him to harvest whatever he needs to in the event of such an event. However, if he were to harvest a large part of the crop he would . . . . . . most likely have to sell at a discount to get rid of it. Such a risk, when multiplied by thousands of farmers out there, can result in economic loss.
There are several other kinds of risks associated with economics. One type of risk is called potential risk. This refers to the probability of an effect of one piece of information, such as earnings, causing another piece of information, such as price rise, in the economy. Potential economic growth, therefore, is the increase in earnings that would be caused by such earnings. The other form of risk is termed equilibrium risk.
The concept of what risks does economic growth require is not easy to define or understand. Many people, however, can readily understand that in the economic realm such risks are unavoidable. No matter what economic policies people follow, sooner or later such policies will result in some form of loss. Therefore, it is wise and prudent, for those involved in the economic arena to develop a realistic but educated view of what risks are involved in running an organization.