Factors affecting economic growth

Written by catherine capozzi
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Factors affecting economic growth
Many factors determine why some nations have faster economic growth than others. (Tsuneo Yamashita/Photodisc/Getty Images)

A standard way economists measure growth is by assessing the country's gross domestic product, or GDP. The GDP indicates how many goods and services are produced by a nation. Wealthier nations typically have a higher GDP than poorer nations. However, a 2009 "Time" magazine article explains economists also measure wealth and growth by assessing a country's resource distribution. Many factors affect a country's ability to grow economically.

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Capital

The amount of labour and equipment is an indicator of the country's supply of capital. The amount of capital in the economy is one factor that determines its rate of economic growth. For example, Belize is limited in its economic growth because of the country's small population, whereas China's large population enables a larger economic output by virtue of its sheer size. The standard hours in the work week also affects output: Populations that value long work weeks, such as the United States, tend to yield a greater output than nations with fewer hours in the work week, such as France.

Technological Progress

The quantity of people working in a company or living in a country does not guarantee large economic growth. Even if a country is abundant in natural resources and a strong labour population, if the country is lacking the basic infrastructure for specific technology, such as electric towers for cell phone transmissions, they will be limited in their economic growth. The technological innovation in the county is a decisive factor of economic progress.

For example, a BBC article explains two reasons for Africa's increased growth from 1990 to 2000 as a threefold increase in telephone service and a 43 per cent increase in households with electricity. Similarly, the United States experienced a substantial increase in its GDP during the industrial revolution of the early 1920s due to the invention of productive machinery that produced more goods in less time.

Investment

Governments are similar to businesses in the way that both need investment to grow. Just as a company gets investments from venture capitalists or shareholders to buy new equipment, governments sell shares of debt in the form of bonds to other nations as a means of raising revenue. An article in the "Concise Encyclopedia of Economics" explains foreign direct investment increases GDP in the short-run, though too much debt may be problematic in the long-run if the nation struggles to pay its debt.

Health

Sickness, disease, high infant mortality rates and other health-related problems can detract from the population's ability to produce goods and services. Therefore, the country's standard of living is one factor of its economic output.

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