Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one time period to the previous one.
Why do we need economic improvement? What are the main factors that foster growth? Many researchers, and economists, try to answer these questions. Economic growth can be considered a major factor in the well-being and prosperity of billions of people. Industrialization and technological progress.
The concept of economic growth
Denison (1962) asserted that economic growth is an increase in real GDP or GDP per capita, an increase in national products measured by constant prices.
The increase is influenced by direct factors such as for example human resources (increasing active population, investing in human capital), natural resources (land, underground resources), increase in used capital or technological advancements. Economic progress is also influenced by indirect factors such as institutions (financial institutions, private administration, etc.), aggregate demand measures, saving rates and investment levels, financial system efficiency, budget and fiscal policies, labor and capital migration and government efficiency.
There are four main determinants of economic improvement: human resources, natural resources, capital formation and technology, but the importance of them Researchers have given each determinant always different. Famous economists provided, from time to time, the most basic ingredients that emerged in modern theories of economic growth.
Determinants of economic growth
Determinants of economic growth are interrelated factors that directly affect the rate of economic increase, namely an increase in the real GDP of an economy. There are six main determinants of growth. Four of them are grouped based on supply factors which include natural resources, human resources, capital goods, and technology. The other two factors are demand and efficiency.
- Supply Factors
These factors affect the value of goods and services provided in an economy.
- Natural resources.
Natural resources include everything that is in nature and which has economic value that can be exploited. The rate of economic growth increased due to an increase in the quantity and quality of natural resources. Examples of natural resources that can have a large influence on the rate of economic increase include fossil fuels, precious metals, oceans, and wildlife.
- Human resources
Human resources include skilled and unskilled labor. Increasing the quantity and quality of the workforce increases the rate of economic growth. Here, quality improvement refers to improving the skills possessed by workers. When more people work, more goods and services are produced and when more skilled workers do a job, they produce high-value goods and services.
- Capital goods
Capital goods are tangible assets such as factories and machinery that can carry out processes that produce the production of other goods and services. Capital goods initially require large investments but they increase production and future growth rates.
Technology includes the methods and procedures used to produce various goods and services. New technology can be discovered or current technology can be improved gradually by investing in research. An even better technique is designed, enabling faster production and increasing economic growth rates.
- Demand Factor
The increased supply of goods and services caused by supply factors must be supported by increased demand for goods and services in the economy.
- Efficiency Factor
Achieving a high ratio of output to input is the result of efficiency. Efficiency includes productive and allocative efficiency. High efficiency increases growth rates when added to full employment. To achieve maximum growth rates, an economy must use its available resources in the cheapest way to produce the optimal mix of goods and services and it must use its resources as much as possible.
The theory of economic growth
- Mercantilism – The wealth of a nation is determined by the accumulation of gold and running a trade surplus.
- Classical theory – Adam Smith emphasizes the role of increasing returns to scale (economies of scale / specialization)
- Neo-classical theory – Growth based on supply side factors such as: labor productivity, labor size, input factors.
- Endogenous growth theory – The rate of economic growth is strongly influenced by human capital and the level of technological innovation.
- The demand side of Keynesian – Keynes argues that aggregate demand can play a role in influencing the economic pace in the short and medium term. Although most growth theories ignore the role of aggregate demand, some economists argue that recession can cause hysteresis effects and reduce long-term economic growth.
- Growth limits – From an environmental perspective, some argue that long-term economic growth will be limited by resource degradation and global warming. This means that economic growth may end – reminiscent of Malthus’s theory.
How to measure economic growth
Gross domestic product is the best way to measure economic growth . This takes into account all the country’s economic output. This includes all goods and services produced by businesses in the country for sale. It doesn’t matter whether they are sold domestically or abroad.
How to increase economic growth
If a country does not have factors of production, it must find other ways to spur growth. The government wants to increase growth because it increases tax revenues. Growth allows businesses to recruit workers, increasing their income. When people feel prosperous, they value political leaders by re-electing them. The government stimulates growth with expansive fiscal policy.
A country’s central bank can also spur growth with monetary policy. This can increase the money supply by lowering interest rates. Banks make loans for cars, schools and houses cheaper. They also reduce credit card interest rates. All this increases consumer spending and economic growth.