5 Factors that Affect the Economic Growth of a Country

The term economic growth is associated with economic progress and advancement.

Economic growth can be defined as an increase in the capacity of an economy to produce goods and services within a specific period of time.

In economics, economic growth refers to a long-term expansion in the productive potential of the economy to satisfy the wants of individuals in the society. Sustained economic growth of a country’ has a positive impact on the national income and level of employment, which further results in higher living standards.

Apart from this, it plays a vital role in stimulating government finances by enhancing tax revenues. This enables the government to earn extra income for the further development of an economy. The economic growth of a country can be measured by comparing the level of Gross National Product (GNP) of a year with the GNP of the previous year. The economic growth of a country is possible if strengths and weaknesses of the economy are properly analyzed.

Economic analysis provides an insight into the essentials of an economy. It is a systematic process for determining the optimum use of scarce resources and selecting the best alternative to achieve the economic goal. Moreover, economic analysis helps in assessing the causes of different economic problems, such as inflation, depression, and economic instability. It is performed by taking into consideration various economic variables, such as demand, supply, prices, production cost, wages, labor, and capital.

Meaning of Economic Growth:

Economic growth can be defined as a positive change in the level of goods and services produced by a country over a certain period of time. An important characteristic of economic growth is that it is never uniform or same in all sectors of an economy For example, in a particular year, the telecommunication sector of a country has marked a significant contribution in economic growth whereas the mining sector has not performed well as far as the economic growth of the country- is concerned.

Economic growth is directly related to percentage increase in GNP of a country. In real sense, economic growth is related to increase in per capita national output or net national product of a country that remain constant or sustained for many years.

Economic growth can be achieved when the rate of increase in total output is greater than the rate of increase in population of a country. For example, in 2005-2006, the rate of increase in India’s GNP was 9.1%, while its population growth rate was 1.7%.

In such a case, per capita increase in GNP would be 7.4% (=9.1-1.7). On the other hand, if the rate of increase in GNP and population is same then the actual growth of GNP would be zero, which implies that there is a decrease in per capita income.

As a result, there would be no economic growth. Therefore, in such a case, standard of living of people would not improve even when there is an increase in the total output of a country. However, such a growth is better than the stagnation of an economy.

The economic growth of a country may get hampered due to a number of factors, such as trade deficit and alterations in expenditures by governmental bodies. Generally, the economic growth of a country is adversely affected when there is a sharp rise in the prices of goods and services.

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Following are some of the important factors that affect the economic growth of a country:

(a) Human Resource:

Refers to one of the most important determinant of economic growth of a country. The quality and quantity of available human resource can directly affect the growth of an economy.

The quality of human resource is dependent on its skills, creative abilities, training, and education. If the human resource of a country is well skilled and trained then the output would also be of high quality.

On the other hand, a shortage of skilled labor hampers the growth of an economy, whereas surplus of labor is of lesser significance to economic growth. Therefore, the human resources of a country should be adequate in number with required skills and abilities, so that economic growth can be achieved.

(b) Natural Resources:

Affect the economic growth of a country to a large extent. Natural resources involve resources that are produced by nature either on the land or beneath the land. The resources on land include plants, water resources and landscape.

The resources beneath the land or underground resources include oil, natural gas, metals, non-metals, and minerals. The natural resources of a country depend on the climatic and environmental conditions. Countries having plenty of natural resources enjoy good growth than countries with small amount of natural resources.

The efficient utilization or exploitation of natural resources depends on the skills and abilities of human resource, technology used and availability of funds. A country having skilled and educated workforce with rich natural resources takes the economy on the growth path.

The best examples of such economies are developed countries, such as United States, United Kingdom, Germany, and France. However, there are countries that have few natural resources, but high per capita income, such as Saudi Arabia, therefore, their economic growth is very high. Similarly, Japan has a small geographical area and few natural resources, but achieves high growth rate due to its efficient human resource and advanced technology.

(c) Capital Formation:

Involves land, building, machinery, power, transportation, and medium of communication. Producing and acquiring all these manmade products is termed as capital formation. Capital formation increases the availability of capital per worker, which further increases capital/labor ratio. Consequently, the productivity of labor increases, which ultimately results in the increase in output and growth of the economy.

(d) Technological Development:

Refers to one of the important factors that affect the growth of an economy. Technology involves application of scientific methods and production techniques. In other words, technology can be defined as nature and type of technical instruments used by a certain amount of labor.

Technological development helps in increasing productivity with the limited amount of resources. Countries that have worked in the field of technological development grow rapidly as compared to countries that have less focus on technological development. The selection of right technology also plays an role for the growth of an economy. On the contrary, an inappropriate technology- results in high cost of production.

(e) Social and Political Factors:

Play a crucial role in economic growth of a country. Social factors involve customs, traditions, values and beliefs, which contribute to the growth of an economy to a considerable extent.

For example, a society with conventional beliefs and superstitions resists the adoption of modern ways of living. In such a case, achieving becomes difficult. Apart from this, political factors, such as participation of government in formulating and implementing various policies, have a major part in economic growth.

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