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Economic Growth

Economic growth can be defined as an increase in a country’s capacity to produce goods and services. This increase is measured by comparing the GNP or GDP of two consecutive years. Both GNP and GDP are used to measure economic growth depending on the intended use of the results.

Cause of Economic Growth

The causes of economic growth differ across countries. Economic growth results from an increase in aggregate demand and supply. An increase in aggregate demand may result from an increase in government spending, lower taxes and lower interest rates. Lower taxations rates increase the consumer’s disposable income, which in turn encourages spending. Lower interest rates attract investments and spending because of the lower cost of borrowing. Increases in wages increase the laborers’ disposable income and spending. Favorable exchange rates make exports cheaper and this increase the quantity of goods and services exported to other countries.

The supply side causes of economic growth lead to an increase in a country’s productive capacity or long term economic growth. These include increases in natural resources, land, capital and labor. Increases in capital include new investments in technology, equipment, and infrastructure. Increases in labor productivity may result from education and training, and investments in modern technology. Population growth increases the working population, which in turn increase labor productivity. Economic growth may result from discovery and utilization of new natural resources. Countries that are endowed with vast natural resources and technological capacity to utilize such resources record high levels of economic growth each year.

Effects of Economic Growth

Economic growth has costs and benefits. It leads to higher levels of income per capital, improved living standards and higher levels of savings. Economic growth leads to improved technology and productivity. Producers have to improve the productivity of their factors of production to meet the high demand for goods and services. Another effect of economic growth is a decrease in unemployment rates. Producers require more labor to meet the increasing demand for their products. Increased production creates new jobs in an economy. Poverty levels declines with low unemployment rates and higher levels of income. The higher levels of production increase exports and taxation revenue for governments. Producers may choose to export some of their products and services.

Some of costs associated with economic growth include environmental pollution and degradation. Long-term economic growth results from exploitation of natural resources and some of them are non-renewable. Some countries over-exploit natural resources in their quest for higher level of economic growth. Economic growth poses a threat of structural unemployment as producers employ advanced technology in production instead of labor resources. Economic growth may also lead to higher levels of inflation and inequalities in income distribution.