Economic growth

Economic Growth


  • Economic growth is the increase in a country’s productive potential over time.
  • It is typically measured by the annual rate of change in Gross Domestic Product (GDP).

Determinants of Economic Growth

  • Investment in Physical Capital: Increase in machinery, infrastructure, or other productive assets can lead to economic growth.
  • Investment in Human Capital: Investments in education, training, and healthcare can enhance workers’ productivity, enhancing economic growth.
  • Technological Progress: Advances in technology can enhance the production capacity of an economy, contributing to economic growth.
  • Institutions and Policies: Clear, fair, and reliable institutions and policies foster economic confidence, making economic growth more likely.
  • Natural Resources: The availability and efficient use of natural resources can also drive economic growth.

Theories of Economic Growth

  • Classical Growth Theory: Proposes that economic growth will cease only when a country’s population growth depletes available resources.
  • Neoclassical Growth Theory: Suggests that it is technological progress, not capital accumulation, which drives economic growth in the long run.
  • Endogenous Growth Theory: Advocates that investment in human capital, innovation, and knowledge are significant contributors to economic growth.

Benefits of Economic Growth

  • Higher Living Standards: A growing economy usually translates into higher incomes and better quality of life for its residents.
  • Increases in Employment: Economic growth often leads to job creation.
  • Increase in Public Revenues: Economic growth can lead to higher tax revenues, allowing for increased public services and infrastructure.
  • Greater Business Confidence: Economic growth can lead to increased investment due to optimism about future economic prospects.

Drawbacks of Economic Growth

  • Income Inequality: Economic growth can lead to increased income inequality if the growth is not distributed equitably.
  • Environmental Degradation: Economic growth can lead to over-utilisation of natural resources, resulting in environmental harm.
  • Inflation: Rapid economic growth can lead to inflation if the growth of aggregate demand outpaces aggregate supply.
  • Infrastructural Strains: High levels of economic growth can strain infrastructure, such as roads and public services.