What is Economic Growth?

It means the rise in the manufacturing levels of a country’s products/services over a while. It is calculated in terms of the real income of the people of the country. When the production of products/services begins, the manufacturers will hire employees, which in turn raises the income of the people and it will also raise the buying power, this eventually leads to the circulation of money that directly helps in the increase in the Gross Domestic Product (GDP). Thus, GDP is calculated by economists to calculate the growth in the country.

Factors of Production

  • Labor: It is a crucial factor of production that is directly related to economic growth. Labor acts as a productive resource for an economy because without it the production process is not possible. Furthermore, production constitutes economic growth.
  • Land: It is a production factor in which production takes place. So, without it, production is not possible. This is why land is an important factor in economic growth.
  • Capital: Capital like machines, equipment, etc. is used to manufacture different final products, and as the manufactured products rise, the economy grows and achieves a higher growth.
  • Entrepreneurship: It is only the entrepreneur whose management skills help an organization to grow systematically. This systematic arrangement of different things makes an organization progressive towards achieving higher economic growth.

Factors Responsible for Economic Growth

  • Gross Domestic Product (GDP): GDP starts functioning as an expansive scorecard of a given country's economic health. It is the value of all final goods and services produced within the boundary of a nation during one year of the economy. GDP includes the income from all the sectors i.e., agriculture manufacturing, trading, services, etc. To estimate the good productive condition as well as the economic condition in the country there should be fewer people below the poverty line. A good percentage of it depends on how effectively and efficiently we use our natural resources. Our productive growth also depends on the manufacturing sectors which leads to industrial growth. Any country which has a lot of manufacturing units could be a good exporter of the products which may help in exchange for foreign currency that ultimately leads to a better place. Economic growth Majorly depends on the GDP of the country.
  • Population: If the population of the country is controlled or restricted then it will lead to a rise in the per capita income of the individual that will help an economy to grow. The economic conditions of the economy depend upon the population of the country. So, the economic condition may vary from one country to another.
  • Education & Tourism: An economic growth is also dependent on education and tourism. When students come for education to another country, it brings foreign currency to the country which will help to boost the country’s progress and improve the economic condition.
  • Foreign Direct Investment (FDI): To boost an economy, the decision-makers of the countries are making policies easy for Foreign Direct Investments in the home country which leads to the efficiency of the companies working in the country and helps the economy to move faster. It helps to increase the employment opportunities for the people of the home country. The decision-makers also create opportunities for the companies of the home country to participate in the foreign projects for improving the productive progress where banks are created and play the role of a guarantor that works for the smooth functioning of the FDIs.
  • Medical Tourism: Nowadays medical tourism plays a vital role in the expansion of the country as people travel for medical emergencies leads to an increase in businesses in the tourism sector.
  • Initial Public Offer (IPO): The people who cannot invest directly in a company are being offered equity shares, debentures to invest in the company which will increase the valuation of the company and leads to the progress of the country.
  • Research: The countries that offer perks with incentives to the persons who research in their country leads to economic expansion as something which comes through research of the person will be named for the country which further helps the country to grow and earn money for their country.
  • Government Policies: The policies play a very important role in the progress of the nation. If the policies are in the favor of the businesses of the people, the production of the products/services will be more which will give opportunities to the businessmen to export their products and help the nation to grow as it brings foreign currency.

Negative Effects of Economic Growth

When the economy is growing, it gives a negative impact on it as well. Some of the impacts are as follows:

  • Pollution: As the country is growing, it leads to pollution like air pollution, water pollution, noise pollution, etc. Breathing problems because of the emission of wastes from the factories due to an increase in production.
  • Inequality in the distribution of Income: When the economic growth of the country increases, the rich people become much richer than ever as they have the best jobs and many more aspects with them and can invest more. Their growth will be at a much higher rate than the nation because of the policies related to the redistribution of income among the levels of the country.
  • Health Issues: The expansion of the nation may lead to health issues among the people of the country like heart diseases, diabetes, etc.

Measurement of Economic Growth

Economic Growth can be measured with the help of real GDP. The growing economy is the progress rate of GDP.

Economic Growth= Real GDP ÷ Population

It means that the GDP per capita is adding up its earnings, so it is called real income per capita i.e., in quantitative terms in economic progress. It is used by the International Monetary Fund(IMF) and World Bank(WB) to determine the economic output and growth of an economy. It is used by them in the comparative analyses of their member nations and price change in capita. The World Bank measures Gross National Income instead of GDP to determine Economic Growth because the calculation of economic growth includes the income sent by the citizens working in the foreign countries.

Per Capita Income

The per capita income is the average income of an economy. It helps to determine how a nation grows over time by looking at its income. Generally, it helps to estimate the economic growth of a nation as follow:

Economic Growth= Real Income ÷ Population

Thus, it helps to measure the standard of living of a nation between two periods of time when compared.

Benefits of Economic Growth

The income of the people of the nation will increase due to the increase in employment opportunities.

  • With the increase in the income of the people, the income from the taxes for the authorities will also increase which helps in maintaining the infrastructure for the public.
  • Income from the taxes reduces the budget deficit of the authorities which further decreases the debts of the government.
  • It helps in reducing the poverty in the country and improve the economic conditions as well. It also means an increase in growth.
  • It will enable the businesses to invest in the market and which in turn gives higher expansion in the future.

Essentials of Growth

  • Investment in Physical Capital: Growth in any country requires investments in physical capital such as plants, machinery, raw materials, etc. The government should provide aid to the businesses to invest in the capitals so that they can work for the growth of the nation.
  • Investment in Human Capital: It means the investment in terms of education and skills to be given to the employees for handling the physical capital. It leads directly to human development as well as productivity growth.
  • Providing Competitive Markets: When there is competition in the market, the businesses try to improve more to give their best to the consumers. It ensures that the people can get more products/services at reasonable prices.
  • Macroeconomically Stable Nation: It helps the investors to invest in the market when the rates of return on the investment and the risk involved in it are in their favor. It is related to the low and stable inflation in the economy, effective management of government taxes, etc.
  • Infrastructure: The good infrastructure of the country plays a crucial role in making the investors invest in the projects. It includes facilities like transportation, communication, regular supply of electricity, financial services, etc.
  • Openness to Trade and Investment: It enables growth in the economy as the trade between nations helps economies to expand faster as it provides competition in the market and exports also improve.
  • Increasing Agricultural Productivity: When the trade between the nations is exchanged, it helps the agricultural sector of a country to also expand and use better technologies to improve their production level.

Common Features of Developing Countries

  • The per capita income level is low in developing countries.
  • The developing countries face poverty which leads to a lower standard of living.
  • The population rate is on the higher side in developing countries.· The distribution of income is not equal among the people as in developing countries people face the problem of skills for handling technological work.
  • The level of production is also very low due to an inefficient workforce, ill-health and lack of education, low work culture, etc.
  • The unemployment rate is generally higher.
  • The people lack technological skills.

Future Aspects of Economic Growth

  • It will make people move out of poverty.
  • It will transform society.
  • It creates employment opportunities.
  • It leads to human development.
  • It may improve the health and education facilities in the economy.
  • We also have some examples of this analysis; In the U.S., every year the government of the U.S. publishes a yearbook for this.
  • Combination of inflation with output because of rising in the wages, thus making the consumers spend more.

Common Mistakes

Some common mistakes are made by individuals in understanding economic growth. These are as follows:

  • Students may get confused between the causes and effects of economic growth.
  • The rational economic man may not always be rational.
  • They can be confused, with the increase in price there is a decrease in the demand of the commodity.
  • Growth in technology causes unemployment.

Context and Application

This topic is significant in professional exams in graduate and postgraduate courses, especially for

  • B.A (Economics)
  • B.com.
  • M.com.
  • M.A (Economics)
  • MBA

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