10 Factors that Affect the Economic Growth of a Country
Economic growth of a country is synonymous with its advancement and overall progress. It denotes the increased capacity of the economy to produce goods and services within a specific time period. Several factors contribute to economic growth such as government policies, currency fluctuations, trade deficits and the changes in prices of goods and services.
Economic growth is one of the most crucial indicators of a progressive economy. Long-term economic growth positively impacts the national income, employment level and the GDP (Gross Domestic Product) of the country. Countries with growing economies are more likely to have the strongest currency in the world. Appreciating currency leads to subsequent adjustment of exchange rate. The countries with the highest currency value in the world have a flourishing economy that developed over the years.
10 Factors that impact economic growth of a country
There are several factors that positively or negatively impact the economic growth of any country. Given below are the top 10:
Natural resources have a great impact on a country’s economic growth. Natural resources include resources produced by nature either on or beneath land. Resources on land include water, and landscapes. Underground resources include natural gas, oil, minerals and non-metals. The natural resources depend upon the weather, and environmental conditions. Countries with abundant natural resources experience a high level of growth than those with meagre resources.
Effectively utilization of resources depends upon the human skills, technological capabilities and availability of funds. An educated and skilled workforce with essential resources propels the economy towards growth. Examples of such economies are the United States, Germany, United Kingdom, France and Germany.
Capital of a country includes land, machinery, transportation, power and means of communication. Procurement and acquisition of all these man-made resources is called capital formation. Capital formation increases per worker capital availability and consequently the capital-labor ratio. Increased capital/labor ratio results in greater productivity of labor, better output and economic growth.
Greater investment in capital will lower the cost of physical labor. Better machinery, factories and robust roadways can minimize inefficiencies, enhance output, and smooth movement of raw materials, goods that increase the GDP.
The skill, education, creative ability and training of the workforce has a direct impact on economic growth of a country. A qualified, trained and well-equipped labor force can contribute effectively to a country’s economy through their high-quality and valuable output.
Uneducated, unskilled or under used human resources burdens the economy by increasing the rate of unemployment. Lack of skilled workers can hamper economic growth while a surplus is of no help to economic growth. Hence, to achieve sustained economic growth, the human resources of a country must be adequate with the essential skills, knowledge and training.
Technological advancement is one of the primary drivers of economic growth. Technology means application of certain scientific methods and techniques for production of goods. In other words, technology involves use of technical instruments through application of knowledge of the workforce.
Scientific and technological development enables the economy of a country to enhance its productivity with minimum resources. As the scientific community makes more discoveries, countries can find innovative ways to apply them to production techniques. Countries that have invested in innovative, cutting-edge technology will exhibit quicker economic growth than those that show less focus on technological progress.
5.Legal and Regulatory Framework
The institutional framework including rules, laws and regulations must support economic growth. If local laws don’t protect rights of individuals and organizations adequately, it can significantly impact a country’s economic progress. Laws must be fair, clear, public and equally applicable to all individuals. The legal system must be equipped to uphold and protect the rights of the citizens of a country. In the absence of a legal system that does not enforce contracts, businesses would not be able to transact, and economic growth will become slower.
Activities such as corruption and tax evasion must be completely non-existent in a country’s administrative system for it to see progress.
6.Social and Political Factors
Social and political factors are key influencers in a country’s economic growth. Social factors are the values, customs, traditions and beliefs of a society that impact economic development to a large extent. A conservative society with an old fashioned belief system and superstitions may stand in the way of achievement and progression. Mass involvement in development programs is imperative for accelerating economic growth. Social organizations must work towards equal opportunities for all economic classes.
The government formulates and implements policies from time to time. These policies may either foster or hinder economic growth of a country. For instance, tax rates levied on public services will impact investment. Removal of tariff barriers will promote more exports that contribute to economic development. Political instability can give a negative shock to a country’s growth.
The currency represents the economy of a country as economic growth results in appreciation of currency. Economically sound countries may have the strongest currency in the world. A country with a weak economy may experience a negative effect on its currency rate. Currency appreciation depends upon various factors such as government policies, interest rates and so on.
The countries with the most expensive currency will have an economy that shows increased export costs and cheaper imports. Currency rates appreciate and depreciate corresponding to the market forces of the business and economic cycle of a country.
The level and standards of education have a significant impact on labor productivity and in turn, economic growth. In the absence of basic literacy, the economy cannot progress from manual labor to high-tech industrial development. High education levels can give opportunities for growth in IT and service sectors.
9.Demand and Supply
An increase in investment, consumption, and export spending increases demand, thereby incrementing economic growth as well. Factors that impact aggregate demand in an economy are interest rates, consumer confidence, asset prices, exchange rates and influence of the banking sector. The supply side factors that impact economic growth are increased investment, higher productivity, new raw materials, increased manpower and technology.
Foreign trade enables countries to establish industries and capture the international market very quickly. The macro-interactions from foreign trade are crucial for developing countries and can help them become self-reliant and boost economic growth.
Countries that realize the importance of the above factors can experience higher growth rate and greater standard of living for the people. Apart from the above factors, the pace of a country’s economy also depends upon its peoples’ attitude and their desire to develop.