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Major Factors Influencing Economic Growth

  Reviewed by: Michelle Seidel, B.Sc., LL.B., MBA
  Written by: Annie Sisk      Updated November 21, 2018
View of Kaisermuhlen, Vienna, Austria

Economic growth is defined as an increase in the amount of goods or services an economy can produce, as measured over a certain period of time. Experts and policy makers alike view economic growth as a universal good, whether it’s being driven by an increase in goods exported to other countries or by increased consumer spending. Yet economic growth, particularly the kind that’s unchecked or unstable, comes with a price tag, which can include higher environmental costs or a spike in income inequality. This can lead to increased political and social turmoil, which often accompany boom or bust economic cycles. Healthy economic growth generally results from several factors.

Productivity Increases

In the context of the economy, productivity simply refers to how much output a company, industry or country generates, compared to some measure of input. Economists measure output in terms of revenues and gross domestic product, among other things. Input is measured by factors such as the workforce or invested capital. Generally speaking, economists associate higher national productivity levels with a greater degree of wealth creation in that country. When unemployment rises, on the other hand, productivity ultimately lags as the workforce loses skills and becomes idle.

Population Growth

National economies are often directly related to population growth. In other words, as a country’s population increases, so too does its economy, generally speaking. People both produce goods and services and consume them by making purchases with earned wages. As the population increases in size, the demand for consumer goods and services continues to increase, as does the national productivity rate.

On the other hand, if gross domestic product, or GDP, growth doesn't keep up with population growth, then GDP on a per capita basis declines. That’s because on average, each citizen would generate less economic value. As a result, the country becomes relatively poorer. For this reason, it’s important that GDP growth outpaces population growth.

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Workforce Education and Health

Common sense dictates that a well-educated, healthy workforce that has all of its basic needs met will be more productive. After all, it’s a challenge to be productive at work when you’re hungry or you don’t have a safe place to sleep at night. Likewise, it’s difficult to do your job well when you don’t understand what you’re doing or why. Countries that do not prioritize education and health for its citizens soon find themselves struggling to maintain productivity and suffer from economic stagnation or even negative growth. If this cycle repeats over time, the country may find itself in a recession.

Ease of Doing Business

To encourage economic growth, most countries try to encourage entrepreneurship – the creation and growth of new businesses. In order to make it easier for individuals to launch and grow those businesses, governments take various approaches to regulating business as a whole, as well as specific markets.

Of course, a country must balance the need for lower barriers to entry for entrepreneurs and new businesses with the need to protect its citizens through consumer safety and financial laws. However, from an economic standpoint, encouraging new businesses and business models means making it easier, not harder, for those businesses to flourish and innovate. The ease of doing business also depends on other variables, including such factors as access to seed capital, the size of the market for the firm's products and taxes.

All things being equal, the power to determine a business’ success rests with the market itself. When a company delivers an innovative, valuable product that meets its customers’ needs, the market rewards that company with increased sales.

About the Author

Annie Sisk is a freelance writer who lives in upstate New York. She holds a B.A. in Speech from Catawba College and a J.D. from USC. She has written extensively for publications and websites in the business, management and legal fields.

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