Major Factors Influencing Economic Growth

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Economic growth is nominal if it includes inflation and real if it doesn't.
Economic growth is nominal if it includes inflation and real if it doesn't. (Image: ekinyalgin/iStock/Getty Images)

Economic growth is an increase in the amount of goods or services an economy can produce measured over a period of time. Generally, it is used as a synonym of gross domestic product and is a top priority for policy makers around the world. There are various factors that influence economic growth rates.

Productivity Increases

Productivity refers to how much GDP the work force generates. The higher the productivity in a country, the more wealth its people create. Productivity is the principal measure of productive creativeness, the gauge of a person's contribution to the growth of the economy. Productivity to a large extent determines an individual's income. Unemployment has a dubious effect on productivity. On the one hand, it increases productivity in the short term as people who are laid off are usually less productive (productivity is calculated on the basis of people who actually work). On the other hand, people who are not involved in any physical or intellectual work soon lose their skills and qualifications, which hampers productivity growth in the long run.

Population Growth

Population matters. The greater the population, the bigger the economy becomes. People produce goods and services, earning wages and in turn generating demand for even more goods and services. If GDP growth doesn't keep up with the population growth, GDP per capita declines, because every citizen generates less economic value and the country becomes relatively poorer. That is why it is important that GDP growth outstrips population growth. A government can encourage population growth through higher birth rates or immigration.

Better Educated and Healthier Workforce

Well-educated and healthier employees have higher productivity. Education and health require government subsidies and a climate in which the private sector is encouraged to educate and treat the country's citizens.

Ease of Doing Business

Entrepreneurial spirits also help the economy grow. It is important that new, more productive businesses should get a chance to change the status quo of the existing business landscapes, coming up with innovative products and delivering better value to the consumer. The ease of doing business is determined by the opportunities an individual has to start a new enterprise, and includes variables such as regulation, access to seed capital, the size of the market for the firm's products, and taxes.

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