What is Economic Growth?

The economic growth of a country is the increase in the market value of the goods and services produced by an economy over time.

We define economic growth in an economy by an outward shift in its Production Possibility Curve (PPC). Another way to explain growth is the increase in a country’s total output or Gross Domestic Product (GDP). It is the increase in a country’s production.

economic growth cycle

Growth doesn’t occur in isolation. Events in one country and region can have a significant effect on growth prospects in another. Economists measure economic growth as the percent rate of increase in real gross domestic product, or real GDP.

Economic Growth is not the same as Economic Development. Development alleviates people from low standards of living into proper employment with suitable shelter. Economic Growth does not take into account the depletion of natural resources which might lead to pollution, congestion & disease. Development, however, is concerned with sustainability which means meeting the needs of the present without compromising future needs.

economic growth factors

Why is Economic Growth Important?

Economic growth is one of the most important indicators of a healthy economy. One of the biggest impacts of long term growth of a country is that it has a positive impact on national income and the level of employment, which increases the standard of living. As the country’s GDP is increasing, it is more productive and hence more people are employed.

Higher economic growth leads extra tax income for government spending, which can also develop the economy. This expansion can also be used to reduce the budget deficit.

increase in tax revenue

Economic growth also helps reduce poverty, but this cannot occur without economic development. Economic growth alone cannot eliminate poverty.

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 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 number 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

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 higher productivity can increase output.

physical capital

3. Population

A growing population means there is an increase in the labor force, which means a higher workforce. One downside of having a large population is that it 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. For example, investing in STEM students or subsidizing coding academies would increase the availability of workers for higher-skilled jobs that pay more.

5. Technology

Another influential factor is the improvement of technology. Technology 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.

law

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 infrastructures such as roads, schools, and hospitals.

roads

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. Lack of an institutional framework 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 help liberalize trade.

Costs of Economic Growth

There are two problems associated with the economic growth:

1. Environmental Costs

Pollution and other negative externalities often accompany increased production or increased economic growth. Economists usually associate an adverse impact on the environment with rapid growth in developing economies.

environmental cost of economic growth

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, the rural population suffers the most.

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