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What Are the Determinants of Economic Growth?

Companies investing in new equipment or facilities is an indicator of economic growth.
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  • Written By: A. Garrett
  • Edited By: John Allen
  • Last Modified Date: 14 November 2014
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Labor, capital, natural resources, and investment are all determinants of economic growth. Economic growth is achieved when the quantity or quality of such determinants of economic growth increases due to population growth, investing, innovation, or educational improvements. The aforementioned factors facilitate economic growth by increasing productivity. For example, a large and skilled workforce allows a region to produce more goods at a faster rate. Increased availability of capital, land, or entrepreneurs in a particular market means more resources can be used to provide the goods and services that society wants and needs, consequently causing salaries to rise and the standard of living to increase.

There are three primary means for the quantity of labor to increase. The first is natural population growth. Immigration from other regions or countries represents the second way. The third is increased rates of participation in the workforce from eligible members of the population — labor quality is improved through formal education or employer sponsored training.

Economic growth through labor is attained in several ways. A high employment level means that companies have the necessary manpower to produce, service, and sell the goods and services that the population demands. Furthermore, the income levels for the entire region or country increase if a high proportion of citizens are employed. This means that consumer demand will remain steady or increase.

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One of the determinants of economic growth that increases productivity is capital. Capital goods are products, buildings, or infrastructure used to manufacture or provide goods and services demanded by the people. Factories, tools, roads, and transport vehicles represent capital goods used by businesses to develop and distribute products and services efficiently. The availability of capital determinants of economic growth is increased by production or acquisition; the quality of capital goods is improved through technological innovations.

Natural resources are determinants of economic growth that serve as factors of production. For example, water may be used to power generators in manufacturing plants or oil may be used to fuel machinery used to transport goods and services to markets. Most natural resources are scarce and cannot be replenished. Consequently, the only way the quantity of natural resources can be increased is through exploration that discovers new sources of the resource in question.

Investments are the final determinants of economic growth. Essentially, investing is the conscious decision to produce capital goods instead of consumption goods in exchange for future returns on investment. Almost all the other determinants of economic growth share a symbiotic relationship with investing.

For example, to increase the quality of the workforce parents, government entities and companies invest in education. In order for natural resources to be harnessed, investments must be made for exploration and drilling. A fledgling baker choosing to purchase a capital good such as a delivery truck as opposed to a sports car represents a form of investment. This is because the delivery truck can be used to deliver baked goods to customers whereas the sports car is a luxury item. The baker chooses to purchase the delivery truck in hopes that he will be able to increase his efficiency by hauling more products or materials.

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SteamLouis
Post 3

@SarahGen-- That's a good point. I think you're right that many countries rely on one or two factors of growth predominantly. Middle Eastern countries rely too much on natural resources, other countries rely too much on investment. Policy makers are not thinking long term. They are looking for a quick fix but a quick fix doesn't really exist. The economy may do fine for a while, but once that factor has been used up or if there is some other issue, the economy will plummet quickly.

SarahGen
Post 2

@stoneMason-- Investment is definitely very important. It's important for every country. But I don't believe that one factor is enough to foster economic growth. There are multiple factors involved and they all need to be favorable.

Yes, investments can make a huge difference. But relying on investments alone will be problematic. Investors are very sensitive. If, for example, there is some kind of conflict or political turmoil in a country, they might pull out. Investors are looking for stability and unfortunately, some of these countries aren't the most stable.

In addition to investment, African countries need to produce. The African continent is rich in natural resources. These countries need to use these resources wisely and invest in education and technology to create more jobs. If they can produce on their own without relying entirely on investors, the growth will be more durable and sustainable.

stoneMason
Post 1

I attended a lecture recently about economy and the African continent. It was very interesting and I learned that foreign investment is very important. African countries are looking for opportunities to grow economically, but they need more foreign investment to do that. So the challenge is finding ways to make these countries more attractive to foreign investors.

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