Economic Growth: Definition, Factors, Types, and Importance 

Economical Growth Definition
Economical Growth: Definition, Factors, Types, and Importance

Economic growth is defined as the increase in the production of goods and services that affect the economy compared to a previous period. Economic growth is one of the most important factors defining a country’s growth. Economic growth allows a country to grow as a whole and have increased income. 

Economic growth is measured in two ways usually. First is the nominal way. This only accounts for the increase in production and services and not for any other factors. The second is called real or adjusted economic growth. In real economic growth, inflation is considered and adjusted in the economic growth. Here, inflation is a phenomenon that decreases the value of money. It hence reduces the purchasing power of the money. For example, what Rs.1000 could buy you last year may be lesser this year. 

Economic growth is mainly measured using values – gross national product (GNP) or gross domestic product (GDP). However, there are alternative options that different entities use. 

The growth of an economy is a scale for the growth of many other factors as well. This includes the overall development of the country and its citizens. 

What is Economic Growth?

Economic growth is a phenomenon that happens when an economy is able to generate more profit. The ability to create a given amount of capital, labor, raw materials and technology determines how much can be produced. Economic growth results from policies that promote the development of any of these.

Before we try to understand economic growth, let’s first understand the economy. 

The economy is defined as the wealth or resource base of a region. The definition of the economy can also be expanded to include how a country creates and consumes products and services. As a result, the economy can also refer to the efficiency with which production and consumption occur, as well as the standard of the produced commodities and services. An area’s financial activities are demonstrated by its economy. It encompasses not only the creation of commodities and services but also the institutions and organizations involved in their creation. Companies or organizations may assist in the production or processing of goods before other businesses or people use them. Any person or entity that is involved in any of the processes is a participant in the economy. An economy is imperative in fulfilling the needs of all its participants in terms of production and consumption. 

A simple example is a market where you buy your groceries. You buy from the market as a part of consumption while someone else sells to the market to earn from their production. On both occasions, the market is necessary. Similar is the case of the economy and its participants. 

Economic growth is when this economy grows. When economic growth happens, the participants produce and consume more.

Economic growth is gauged using GDP mainly. One of the most popular scales of economic growth is gross domestic product (GDP). GDP is the value added to an economy by producing goods and services. An increase in GDP is often considered a scale for economic growth. 

What are the factors of Economic Growth?

The economic growth of a country is mainly affected by six factors –  Natural Resources, Technology, Human resources, Infrastructure, Social Factors, and Political Factors. All these factors directly affect economic growth. A country that has a strong economy compared to others usually has the upper hand in most of the below factors.

factors of Economic Growth
Factors of Economic Growth

Let us take a look at each of the factors of economic growth individually.

1. Natural Resources

Natural resources are assets that a country or a region has that can be used directly or after modifications. Natural resources are one of the most crucial factors that affect economic growth. The abundance of natural resources can amplify economic growth on a grand scale. 

A popular example of natural resources is oil. Oil is a necessity and is in high demand. The world has seen multiple times how important oil is, especially where is a choke on demand for any reason. This makes oil a very important natural resource. Countries with an abundance of oil are often the richest. Some of these countries have become wealthy despite unfavorable other natural conditions. Here, the export of oil can help the economy grow quickly. 

All natural resources help in economic growth similarly, although on different scales.

Coal is the most abundant natural resource in India. India is the fourth largest coal reserve in India and is one of the biggest exporters. The same has helped India grow its economy over the years.

What makes natural resources stand apart is their scarcity. They are formed over the course of millions of years, and it is impossible to produce manually. This hikes their demand, and at the same time, the economies that depend on natural resources may have to fund alternatives as they can run out in time. For example, several studies have shown that the earth will run out of fossil fuels in about 50 years. By this time, economies that depend on fossil fuel export will have to rethink or end up struggling. 

2. Technology

Technology is another factor that greatly aids economic growth, especially in today’s day and age. Technology is something that can’t be ignored. A certain country holding a certain technology gives an immense advantage. It increases their export, and more revenue will start flowing in.

An example of this is the semiconductor business. Only certain companies that belong to certain economies have successfully mastered semiconductors today. There are limited producers for the same. That means the demand for semiconductors will increase, especially given the number of smartphones that are sold today. This helps their economies grow as well.

But there are drawbacks in depending solely on technology as your growth factor as well. For instance, if other countries are able to master the technology that you own, the demand for yours will start to degrade. If your country has been dependent on this, this scenario may negatively affect its economy. 

But at the same time, some of these negative impacts are unavoidable and are often part of global growth. 

3. Human Resources

Human resources play a vital role in a country’s economic growth. Human resource is the collective workforce an economy has. The more the expert workforce, the better the economy may grow. 

An example of this is India. One of the strongest contributors to India’s economic growth is income from foreign companies. A large portion of this comes from the salaries of employees working in these companies. Salaried employees will also pay income tax, which helps the nation’s budget. The same indirectly aids economic growth. 

Here, the companies depend on India due to two factors. One is cheaper labor, and the second is India’s human resources. As India develops, the first factor will fade away, and companies will stay exclusively for India’s workforce. 

Human resources are important as it enables economic growth from a core level. Human resource development in fields like research, education, and management promotes creativity, social health, equality, higher levels of production, and higher participation rates, all of which support economic growth.

4. Infrastructure

Infrastructure refers to the physical amenities that serve a country and its people. It includes roads, transportation facilities, connectivity, internet facilities, and a lot more. A good infrastructure paws the way for economic growth in multiple ways. 

The biggest example of this is transportation facilities. When a country makes it easier for its citizens and businesses to move from one place to another, businesses will thrive, and even more businesses, even from abroad, will be attracted to open their business in the economy. But how does a country ensures this? They could build better roads, better public transport, build more ways of transportation, etc.

Another similar factor is the internet facilities. Better internet facilities and overall connectivity make it easier for businesses to operate. This helps an economy grow.

But countries have to ensure their technology doesn’t become stagnant. Many times, companies may get stuck with the technologies they have, and it may impact economic growth negatively. 

5. Social Factor

Social factors in the economy are related to the attributes of the country’s human resources. Better social factors positively impact a country’s economic growth. The main indicators here are income, education, employment,, and social support.

Income refers to the earnings of each member of the economy. If the income of the citizens increases, they may spend more collectively. This positively impacts the money flow and helps businesses. All these factors stimulate economic growth. 

Education is another crucial factor affecting other factors like education. When citizens have better education, they may be able to contribute better to the economy directly and indirectly. Better education also means increased income, which will help the economy. 

Employment is another factor that contributes to the economy. Employment helps a citizen have more income. This directly helps the economy as they may spend more money, stimulating economic growth. Furthermore, employed citizens will pay income taxes, which also helps the country grow. 

Social support also facilities economic growth. Social support is the support access to a citizen through communities. Adequate social support will enable citizens to contribute more to the economy. 

6. Political Factor

Political factors are important in the growth of an economy. The political scenario in a country must be hospitable for economic and infrastructure growth. Governments focusing on other factors often hurt a country’s economic growth. 

The same is important for foreign investment, too, as they will always be looking for a safer place to invest. 

What are the types of Economic Growth?

There are primarily two types of economic growth – intensive economic growth and extensive economic growth. Intensive growth gauges economic growth on a production scale, while extensive growth does the same on a scale of available labor and human resources. Let us understand both topics deeply.

1. Intensive Economic Growth

Intensive economic growth looks at the overall production in an economy to see how much the economy has grown. According to intensive economic growth theorists, economic growth is achieved when production increases in a time period compared to the previous similar period. The idea of intensive economic growth was first coined by Karl Marx, which is closely related to socialism. At that time, production consisted mostly of crops alone but has changed a lot. 

2. Extensive Economic Growth

Extensive economic growth looks at the available resources for production. For example, it looks at the available labor (human resources), technology, or even feasibility. In that sense,  economic growth is said to be achieved when the factors that aid the same have increased in a certain time compared to a similar period.

Extensive economic growth refers to growth brought on by the increase of labor, money, environmental assets, etc. On the other hand, intensive economic growth is growth brought on by improvements in labor and capital productivity, resource allocation efficiency, etc.

The major distinction between the two is that. In contrast, intensive growth refers to the effective use of all resources in an economy, and the gain that is realized, extensive expansion merely refers to a numeric rise. With technological innovation and improvement, rapid economic expansion is feasible.

What is the importance of Economic Growth?

Economic growth is important for the sustainability of a nation. The revenue of a state grows when the economy grows. This means that the state can provide more for the public in terms of public services, infrastructure, living conditions, etc. 

Economic growth also directly affects the people in a country. The employment and income of a state increase when the economy grows. This helps people have better living conditions and overall a better life. 

They will also have access to better medical care, public transport, communication systems, etc, as the state can afford the same. 

How to calculate Economical Growth?

Economic growth is not a definite scale, and hence exact measurements are impossible. Instead, certain factors related to economic growth are measured to weigh the scale of it. 

One such factor is gross domestic product (GDP). GDP is the measure of the value of all services and goods produced in a country in a specific time period. It is calculated using the below equation –

GDP = private consumption + gross private investment + government investment + government spending + (exports – imports).

Inflation-adjusted GDP or Real gross domestic product (real GDP) is the GDP figure adjusted to inflation. Inflation is a phenomenon that decreases the value of money. It hence reduces the purchasing power of the money. Real GDP is also used to gauge economic growth at times. It can be found using the formula – Real GDP = Nominal GDP / Deflator

Is economic growth always beneficial?

Yes, economic growth is beneficial in most aspects. It helps you enjoy better living conditions, wages, and services. 

But often, inflation can become a by-product of economic growth. But the growth often covers for the same. At the same time, it is important to understand that inflation is not caused by economic growth alone but is merely a passive contributor.

Is there a bad effect on economic growth?

Economic growth could have certain bad effects too. One of the most prominent here is natural destruction. Often, natural resources and forests and destroyed to enable growth. This has certain side-effects like global warming. 

What is the difference between economic growth and economic development?

Economic growth and economic development are two different phenomena. Take a look at the below table to understand this better.

Economic GrowthEconomic Development
Increase in the monetary and tangible values of growth in a nation during a particular time period.It is the overall development of life in a nation, including health, income, etc. Economic growth is a part of economic development.
Span of Concept
Economic Growth is narrower as a concept and hence, easier to gauge.It is a broader concept and often hard to compare or gauge.
Term of the growth
Short-term processLong-term process
Economic growth is a quantitative measurementThe scope of economic development include both quantitative and quantitive measurement
Applicable to
Mostly applicable most countriesMore important for developing economies.
Government Support
Economic growth may not require government support, but the same help stimulates economic growth.Government has a direct role in economic development. The government is often the sole facilitator as well.
Kind of changes expected
Quantitative changesQuantitative as well as qualitative changes
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