Understanding Economic Growth

Economic growth describes an increase in a country’s production and consumption of goods and services over a period of time.
It is usually measured as the percentage increase in real gross domestic product (GDP) — or the nation’s total output adjusted for inflation.
Real GDP is a preferable measure because it better reflects changes in the nation’s economic output.
The rate of economic growth refers to the geometric annual rate of growth in GDP between the first and the last year over a period of time, which is often annually.
Long-term economic growth depends on increases in productivity, technological improvement, and capital accumulation.

Factors Influencing Economic Growth

Productivity: An increase in productivity can lead to economic growth as a larger quantity of goods and services are created.
Investment: Channeling more resources into physical capital or human capital can increase growth.
Innovation: Technological advances can lead to a surge in business efficiency and productivity, fostering economic growth.
Demographics: Population growth can propel economic growth by adding to the labour force, although it can also strain resources and lower living standards if not various factors like productivity are not managed.
Institutions: Effective governance structures, rule of law, and a sound financial system can create an environment conducive to economic growth.

One of the key macroeconomic objectives of a government is promoting steady and sustainable economic growth.
This objective seeks to maximize the potential growth of an economy and minimize the output gap — the difference between actual and potential output.
If an economy grows too quickly, it could result in inflation, asset-price bubbles, and other issues. If it grows too slowly, it can lead to unemployment and insufficient public services.
An imbalance in growth can also lead to regional disparities and income inequalities.

The government can support economic growth through both fiscal policy (manipulating public spending and taxation) and monetary policy (manipulating interest rates and money supply).
Through fiscal policy, governments can create conditions that encourage private sector growth, such as reducing taxation or increasing public spending.
Monetary policy, typically conducted by the central bank, can manage inflation and stabilize the economy. Lowering interest rates can stimulate growth by making borrowing cheaper and encouraging spending.
Both policies can be used to guide the economy towards a target growth rate to prevent imbalances.

Environmental sustainability: Rapid economic growth could lead to degradation of the environment and unsustainable use of natural resources.
Income inequality: Economic growth can result in wealth gaps if not distributed equitably.
Structural change: Rapid growth can cause significant shifts in industries and employment sectors, which can require major social adjustments.
Inflation: Too rapid economic growth can lead to inflationary pressures.
Capital accumulation: The process of accumulating capital for growth can cause an economy to be vulnerable to economic shocks and recessions.