Economic growth: essence, factors and types

The term economic growth is associated with economic progress and advancement.

Economic growth is the increase in the amount of the goods and services produced by an economy over time.

Factors that affect the economic growth of a country:

1. Human Resource:

Refers to one of the most important determinant of economic growth of a country. The quality and quantity of available human resource can directly affect the growth of an economy.

The quality of human resource is dependent on its skills, creative abilities, training, and education. If the human resource of a country is well skilled and trained then the output would also be of high quality.

2. Natural Resources:

Affect the economic growth of a country to a large extent. Natural resources involve resources that are produced by nature either on the land or beneath the land. The resources on land include plants, water resources and landscape.

The resources beneath the land or underground resources include oil, natural gas, metals, non-metals, and minerals. The natural resources of a country depend on the climatic and environmental conditions. Countries having plenty of natural resources enjoy good growth than countries with small amount of natural resources.

The best examples of such economies are developed countries, such as United States, United Kingdom, Germany, and France. However, there are countries that have few natural resources, but high per capita income, such as Saudi Arabia, therefore, their economic growth is very high. Similarly, Japan has a small geographical area and few natural resources, but achieves high growth rate due to its efficient human resource and advanced technology.

3. Capital Formation:

Involves land, building, machinery, power, transportation, and medium of communication. Producing and acquiring all these manmade products is termed as capital formation. Capital formation increases the availability of capital per worker, which further increases capital/labor ratio. Consequently, the productivity of labor increases, which ultimately results in the increase in output and growth of the economy.

4. Technological Development:

Refers to one of the important factors that affect the growth of an economy. Technology involves application of scientific methods and production techniques. In other words, technology can be defined as nature and type of technical instruments used by a certain amount of labor.

Technological development helps in increasing productivity with the limited amount of resources. Countries that have worked in the field of technological development grow rapidly as compared to countries that have less focus on technological development. The selection of right technology also plays an role for the growth of an economy. On the contrary, an inappropriate technology- results in high cost of production.

5. Social and Political Factors:

Play a crucial role in economic growth of a country. Social factors involve customs, traditions, values and beliefs, which contribute to the growth of an economy to a considerable extent.

There are 4 types of economic growth:

1. Balanced Economic Growth
2. Un-balanced Economic Growth

3. Extensive

4. Intensive

1. Balanced Economic Growth:
All the economic sectors are growing at same ratio or percentage, this growth is known as balanced economic growth.
2. Un-balanced Economic Growth:
When some sectors of the economy are growing faster than others, and their rate of growth is different to each other, this growth is known as un-balanced economic growth.

3. Extensive Economic Growth:
Economic growth is achieved by increasing number of production factors

4. Intensive Economic Growth:
 Economic growth is achieved by increasing quality of production factors, i.e. using of new quality raw materials, new technology and others

 

GNP and ways of its calculation according to the income

GNP stands for Gross National Product. In general terms, GNP means the total of all business production and service sector industry in a country plus its gain on overseas investment. In some cases GNP will also be calculated by subtracting the capital gains of foreign nationals or companies earned domestically.

Calculation according to the income:

This method of calculating GNP involves measuring the income generated by selling output. By selling outputs, firms earn revenue. This revenue is utilized for the payment of rent, interest, wage, indirect tax payments as well as for buying inputs and enjoys what is left-over as profits.

Revenue = rent + interest + wage + costs of intermediate inputs + indirect taxes + profit

If costs of intermediate goods are deducted from revenue we obtain value added. Thus, value added = rent + interest + wage + indirect taxes + profit

Since the value of GNP is equal to the sum of the value added of all firms operating, GNP must also equal the sum of all payments, i.e.,

GNP = rent + interest + wage + indirect taxes + profit

This means that GNP is the sum of all payments to the input owners plus government revenue from indirect taxes.

Or national income is the sum of the values earned by each factor of production— land, labour, capital and entrepreneurship. The measures derived are comparable to those obtained from the product side of the accounts. Since GNP is the sum of all values added, it must also be the aggregate of all incomes subdivided into rent, wages, interest, and profit, plus indirect taxes.