What Causes Economic Growth? {{ currentPage ? currentPage.title : "" }}

The term “economic growth” describes the gradual expansion of a nation's economy. Typically, the gross domestic product (GDP), or the sum of all goods and services produced in an economy, is used to determine the size of that economy

Real or nominal values can be used to gauge economic growth. The rise over time in the dollar value of production is referred to as nominal economic growth. Both the amount produced and the cost of the goods and services provided can alter. Economists typically refer to real economic growth, which is output growth simply, eliminating the impact of fluctuating prices. This is so that it more accurately depicts how much a nation is generating at any particular period about other times.

Causes of Economic Growth

Real GDP growth equates to economic expansion. Increases in national output and income are indicators of economic growth.

There are two basic causes of economic growth:

1. A Growth in Aggregate Demand (AD)

A rise in aggregate demand (AD) drives economic growth in the short term. If the economy has excess capacity, an increase in AD will result in a higher level of real GDP.

Like GDP, aggregate demand (AD) refers to the overall level of economic spending. As a result, when aggregate demand is calculated, it equals GDP. Spending by households (also known as consumption, C), corporate and household investment, government spending, and net spending from abroad are all included in aggregate demand, explains, Sawyer, economics assignment help expert.

  • Consumption

Household consumption (C) refers to spending by households on things like rent, groceries, and utilities. It makes up the largest share of aggregate demand. The level of consumption by each household is largely dependent on their level of income (Y). Household income that is not spent, is saved (S).

  • Investment

Investments are expenditures made by companies and families to expand the economy's ability to create products and services. Interest rates, anticipated earnings, governmental policies, and technological advancements are just a few of the variables that affect how much money is invested in the economy.

  • Government Spending

Government spending on initiatives to assist the unemployed will grow during an economic crisis when the unemployment rate has risen.

  • Net Exports

Expenditure on imports is subtracted from spending on exports to determine net exports. Since GDP gauges production within a nation, while imports are produced abroad, the cost of imports is deducted from the cost of exports.


Factors that Affect Aggregate Demand (AD)

  • Lower Interest Rates: Lower interest rates make borrowing less expensive, which stimulates investment by businesses and consumer spending. Lower interest rates also result in lower mortgage payments, which raises consumer disposable income.

  • Increased Government Spending:  A few examples of government spending increases that enhance disposable income include increased spending on welfare benefits or investments in new roads.

  • Devaluation: Exports become more affordable and plentiful as a result of a decline in the value of the exchange rate, such as the Pound Sterling. Furthermore, a depreciation increases the cost of imports, which decreases their volume and increases the appeal of domestic goods.

  • Confidence: Households are encouraged to spend by either depleting savings or using more personal credit when there is an increase in consumer confidence. It permits increased spending (C),

  • Reduced Tax: Reduced income taxes will boost consumers' disposable income and spur expenditure (C).

  • Increasing Home Prices: A rise in housing costs has a favorable wealth effect. If the value of their homes increases, homeowners will be more willing to spend (re-mortgaging house if necessary)

  • Monetary Security: The aggregate demand will rise if there is financial stability and banks are prepared to lend, as this would encourage corporate investment.

2. An Expansion in The Aggregate Supply (Productive Capacity)

This requires an increase in the long-run aggregate supply (productive capacity) as well as AD, says, Lorena, an expert writer at Economics Assignment Help Australia.

Factors Affecting Long-Run Aggregate Supply

  • Increased Capital: such as investment in new manufacturing or infrastructure projects like constructing roads and phone lines.

  • Increase in The Working Population: Rise in the working population, due to factors like immigration and a greater birth rate.

  • Increase in Labour Productivity: Improved technology or greater education and training can both increase labor productivity.

  • Discovering new raw materials: Finding oil reserves, for instance, will boost national productivity.

  • Technological Improvements: technological advancements to raise both labor and capital productivity, such as the internet and microcomputers both helped the economy grow more quickly. Future technological advancements like artificial intelligence (AI), which allows robots to replace human jobs, may contribute to economic growth.

Other Factors Which Affect Economic Growth

  • Political and Economic Stability: For businesses to feel confident investing in expanding capacity is a good move, stability is crucial. When there is an increase in uncertainty, confidence tends to decline, which might lead to businesses delaying investment.

  • Minimal Inflation: A low level of inflation is favorable for promoting corporate investment. Volatility is increased by high inflation.

The Bottom Line

The two main factors contribute to economic growth: an increase in the workforce's size and an increase in that workforce's productivity (output per hour worked). Both can expand the economy's overall size, but only robust productivity growth can raise per capita GDP and income.


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