Economic Growth Factors

The economic growth of a country is the increase in the market value of the goods and services produced by an economy over time. Growth doesn’t occur in isolation, events in one country and region can have a significant effect on growth prospects in another. Economic Growth is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.

economic growth factors

Why is Economic Growth Important?

Long term growth of a country has a positive impact on national income and the level of employment, which increases the standard of living. It also leads extra tax income for government spending, which can also develop the economy. Economic growth also helps reduce poverty, but this cannot occur without economic development.

Six Factors That Increase Economic Growth

The follow six causes of economic growth are key components in an economy. Improving or increasing their quantity can lead to a growth in the economy.

1. Natural Resources

The discovery of more natural resources like oil or mineral deposits may boost Economic growth as this increases the country’s Production Possibility Curve. It is difficult, if not impossible, to increase the amount of natural resources in a country. Countries must take care to balance the supply and demand of scarce natural resources to avoid depleting them. Improved land management may improve the quality of land and contribute to economic growth.

2. Physical Capital

An increased  investment in physical capital such as factories, machinery and roads will lower the cost of economic activity. Better factories and machinery are more productive than physical labor. This can increase output.

3. Population

A growth in the labor force means there is a larger population and more manpower. However, this could lead to high unemployment.

4. Human Capital

An increase in investment in human capital can improve the quality of the labor force. A skilled labor force has a significant effect on growth.

5. Technology

Another influential factor is the improvement of technology. This could increase productivity with the same levels of labor, thus accelerating growth and development.

6. Law

An institutional framework which regulates economic activity such as rules and laws. There is no specific set of institutions that promote growth.

Six Factors that Limit Economic Growth

1. Poor health and low levels of education

People who don’t have access to healthcare or education have lower levels of productivity.

2. Lack of necessary infrastructure

Developing nations often suffer from inadequate infrastructure such as roads, schools and hospitals.

3. Flight of Capital

Money often flows out the country to seek higher rates of returns.

4. Political Instability

Instability in the government scares investors and hinders investment.

5. Institutional Framework

Often local laws don’t adequately protect rights. This can severely impact progress and investment.

6. The World Trade Organization

Many economists claim that the World Trade Organization (WTO) and other trading systems are biased against developing nations. Many developed nations adopt protectionist strategies which don’t really help liberalize trade.

Costs of Economic Growth

There are two problems associated with the economic growth:

1. Environmental Costs

Increased production is often accompanied by pollution and other negative externalities. An adverse impact on the environment is often associated with rapid growth in developing economies.

2. Rising Income Inequality

Growth often leads to increased income inequality. Those not involved or related to the growth-generating sector of the economy get left behind. Usually, rural populations suffer the most.

Costs of Economic Growth

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