Economics is all about coping with shortages by making wise decisions. Economic growth is the most basic metric used to assess the effectiveness of resource allocation. People keep track of their earnings and the fluctuating worth of their assets. Companies keep track of their earnings and market share. Countries track a variety of data, including national income, productivity, and others, to gauge economic progress. Some economists contend that any evaluation of a country’s economy must take into account factors such as distribution, equity, per-capita income, and more in addition to growth and productivity. To sustain economic growth and enable overall human development in the economy, a nation should also concentrate on other societal needs, such as environmental justice or cultural preservation. This will open up more opportunities in the fields of employment, education, healthcare, and environmental conservation.
Economic Growth
The process through which a nation’s actual national and per capita income increases over an extended period of time is referred to as economic growth. The following characteristics of economic growth are included in this definition:
Economic growth is implied by a process of rising national income as well as per capita income; nevertheless, per capita income growth is a more reliable measure of economic growth because it shows a general improvement in living standards.
Real national income growth, not merely increases in money income or nominal national income, is the key indicator of economic growth. In other words, the increase should reflect an increase in the production of products and services rather than simply reflecting an increase in the market prices of already-available items.
Increase in Real Income should be over a Long Period: Real national income growth and per-capita income increases should continue for a considerable amount of time. It is important to distinguish between economic growth and short-term seasonal or transient improvements in income.
Increase in income should be based on Increase in Productive Capacity: Increases in income can only be maintained if they are the result of a significant and long-lasting improvement in the economy’s productive capacity, such as modernization or the use of new technology in manufacturing, the improvement of infrastructure, such as the transportation system, or improved electricity generation.
Economic Development
A steady improvement in the material well-being of society is referred to as economic development. Economic growth is just one aspect of economic development. Apart from the growth of national income, it also involves social, cultural, political, and economic advancements that benefit the material world. These advancements include changes in the availability of resources, the rate of capital formation, the size and composition of the population, technology, skill, and efficiency levels, as well as institutional and organizational structures. These advancements all contribute to the larger objectives of ensuring equitable income distribution, boosting employment, and reducing poverty. In a nutshell, economic growth is a series of interconnected changes in fundamental sources of supply and in the structure of demand that, over time, increase a nation’s net national product.
The word “economic growth” is limited. Together with changes in quantitative terms, like growth in output or national revenue, economic development also involves changes in qualitative terms, such social attitudes and practices. Growth without economic progress is essentially impossible.
Factors Affecting Economic Growth
Economic growth is a highly complicated phenomenon that is influenced by a wide range of variables, including political, social, and cultural ones. These elements are listed below:
Economic Factors
- Natural Resources: Natural resources are the main factor influencing how an economy develops. The land area and the quality of the soil, the abundance of trees, the good river system, the availability of minerals and oil, the favorable climate, etc. are examples of natural resources. The quantity of natural resources is crucial for economic progress. A nation with insufficient natural resources might not be able to grow quickly. Rich natural resource availability is a prerequisite for economic growth, but it is not adequate in and of itself. Natural resources are misused, underutilized, or wasted in less developed nations. This is one of the causes of their lag in development. Nonetheless, despite lacking a wealth of natural resources, nations like Singapore, Japan, and others rank among the world’s most developed. These nations have demonstrated a dedication to protecting the available resources, making every effort to manage the resources, reducing resource waste, etc.
- Capital Formation: Another significant component for the growth of an economy is capital accumulation. Capital formation is the process through which a community’s funds are directed toward investments in capital goods like plant, equipment, and machinery that boost the productive capacity of a nation and worker efficiency, ensuring a larger flow of products and services in a country. The idea behind capital formation is that a community does not spend all of its money on products for immediate consumption, but instead saves some and invests it in the creation or acquisition of capital goods that significantly increase the country’s overall capacity for production.
- Technological Progress: The development of technology plays a significant role in influencing the rate of economic growth. The development of new, more effective production techniques or the refinement of current ones is primarily what is meant by technological progress. Natural resources may occasionally become available as a result of technological advancement. Yet, increased productivity is typically a result of technical advancement. In other words, as technology advances, we are better able to exploit natural resources and other resources to boost production in a more efficient and fruitful way. With the aid of advanced technology, it is now possible to get a given output using a given amount of resources, or a given output using a given amount of resources. The development of new technologies makes it possible to utilize natural resources more effectively. For instance, the use of power-driven farm equipment has significantly increased agricultural output. The utilization of cutting-edge technology has given the USA, UK, France, Japan, and other advanced industrial nations a strong industrial base. In actuality, implementing innovative production methods helps economic progress.
- Entrepreneurship: Entrepreneurship entails the capacity to identify fresh investment prospects, a readiness to accept calculated risks, and a willingness to invest in developing and expanding business segments. The majority of the world’s impoverished nations are poor not because of a lack of capital, a bad infrastructure, untrained labor, or a lack of natural resources, but rather due to a severe lack of entrepreneurship. Therefore, it is crucial to foster an environment that encourages entrepreneurship in underdeveloped countries by placing a focus on education, fresh research, and scientific and technological advancements.
- Human Resources Development: The level of economic growth is greatly influenced by the population’s quality. So, it is highly beneficial to invest in human capital through programs for education, health care, and other social programs. Human resource development broadens people’s knowledge, abilities, and skills, which raises their productivity.
- Population Growth: Population increase generates more workers and a larger market for goods and services. As a result, more labor generates more output, which a larger market can consume. By this process, output, income, and employment all continue to increase while economic growth gets better. Yet, the population rise ought to be typical. Population growth that is out of control impedes economic development. Only in a country with a low population density is population expansion desirable. Yet, in a nation with a high population density like India, it is unjustified.
- Social Overheads: The availability of social overheads such schools, universities, technical institutions, medical colleges, hospitals, and public health facilities is another crucial factor in determining economic growth. These facilities promote responsibility, efficiency, and health among the working population. These people have the potential to advance the economy of their nation.
Non-Economic Factors
Economic development is influenced by both economic and non-economic elements, such as socio-economic, cultural, psychological, and political forces. Here, we go over a few of the key non-economic variables that affect an economy’s ability to grow economically.
- Political Factors: For the contemporary economy to grow, political stability and effective governance are crucial. Faster economic growth is achieved through having a strong, stable, and effective government, as well as an honest and transparent administration, transparent policies, and effective implementation of those policies.
- Social and Psychological Factors: Social elements, such as social attitudes, social values, and social institutions, alter as a result of increased education and the cultural fusion of many societies. New discoveries and breakthroughs are made possible by modern philosophy, values, and attitudes, which also contribute to the emergence of new entrepreneurs. The antiquated societal norms limit regional and vocational mobility, which is a barrier to economic growth.
- Education: Education is now widely acknowledged as the primary means of development. In nations with widespread access to education, more progress has been made. The development of human resources, increased labor productivity, and the removal of mental barriers to new ideas and information all result from education, which also supports economic growth.
- Desire for Material Betterment: Economic development requires material advancement, which is a fundamental prerequisite. The economies of the cultures that emphasize self-satisfaction, self-denial, faith in fate, etc., are held back by limiting risk and enterprise.