Determinants of Economic Growth

Determinants of economic growth are inter-related factors that directly influence the rate of economic growth i.e. increase in real GDP of an economy. There are six major determinants of growth. Four of these are typically grouped under supply factors which include natural resources, human resources, capital goods and technology. The other two are demand and efficiency factors.

Supply Factors

These factors affect the value of goods and services supplied in an economy.

Natural Resources: Natural resources include anything that exists in nature and which has exploitable economic value. Rate of economic growth increases on increase in quantity and quality of natural resources. Examples of natural resources which can have major effect on rate of economic growth include fossil fuels, valuable metals, oceans, and wild life.

Human Resources: Human resources include both skilled and unskilled workforce. Increase in the quantity and quality of the workforce increases rate of economic growth. Here, increase in quality refers to improvement of skills the workers possess. When more people work, more goods and services are produced and when more skilled workers do a job, they produce high value goods and services.

Capital Goods: Capital goods are tangible assets such as plant and machinery that can carry out processes which result in the production of other goods and services. Capital goods require big investments initially but they increase production and growth rate in future periods.

Technology: Technology includes methods and procedures used to produce various goods and services. New technology may be invented or current technology may be improved gradually by investing in research. Better techniques once devised, allow faster production and increase rate of economic growth.

Demand Factor

The increased supply of goods and services caused by the supply factors must be sustained by increased demand for goods and services in the economy.

Efficiency Factor

Achieving high output to input ratio is the result of efficiency. Efficiency includes both productive and allocative efficiency. High efficiency increases growth rate when it is coupled with full employment. To achieve maximum growth rate, an economy must use its available resources in the least costly way to produce the optimum mix of goods and services and it must use its resources to the maximum extent possible.

Written by Irfanullah Jan