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What Factors Affect Economic Growth Rates?

Achieving economic growth rates that are sustainable is a direct reflection of strong institutions in society that addresses multiple factors.
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  • Written By: Kenneth W. Michael Wills
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 08 December 2014
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There are a variety of factors that can affect economic growth. Some of the most noted factors include interest rates, strength of currency, economic policy, the environment and economic health. Other important factors that impact economic growth rates include advancements in technology, availability and level of both human and financial capital, level of infrastructure, rates of investment and the physical health of the population. In addition, prices of commodities and political instability can adversely affect the economy’s ability to grow or recover from a downturn. It is important to note that each of the factors are interrelated; therefore sound structuring and prudent flexibility from regulatory, social and public administrative perspectives are all essential to achieving healthy economic progress.

IInterest rates can have a major impact on an economy. For example, if interests are too high people will delay purchases that require financing, and companies will delay expansion efforts or investment projects. Strength of currency is important for importing raw materials, human capital and goods to facilitate production or expand research. Weakened currencies, however, can help achieve growth for economies heavily invested in exports.

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Favorable economic policy backed by strong regulations is important to cutting out corruption in the economy, which drives up costs and inhibits growth, while encouraging an environment of entrepreneurship. Environmental factors and physical health also affect economic growth rates. Unregulated industries can pollute the environment, leading to severe health consequences. Unhealthy populations are not productive, and resources have to be diverted to clean up messes and address health concerns, which are both waste that need to be avoided. Interrelated, each of these factors should work in concert with one another to stimulate economic growth.

Progress in the development and sophistication in the use of technology has proven to have a major affect on economic growth rates. Technology enables the economy by increasing productivity and efficiency. Availability and usage of human capital likewise boosts economic growth with large populations working longer hours, usually outperforming smaller populations working less. Nations with healthy literacy rates and higher levels of achievement in education are also in a better position to both innovate and take advantage of technological innovations to sustain economic growth. Accessible financial capital is also important to start new projects and move projects forward, favoring nations with strong fiscal policies and regulations that encourage savings and investments.

Infrastructure is another crucial aspect of a nation achieving economic growth. Quality infrastructure facilitates the movement of people, raw materials and goods as well as allows for efficient communication, data and capital storage, while facilitating their transmission and creating a conducive environment for investment. Without investment of time, money, assets and resources, economies stagnate or deteriorate, rather than grow. Lack of investment tends to drive up the prices of commodities, which are the raw goods that enable production, while contributing significantly to political instability and creating environments of social unrest.

Achieving economic growth rates that are sustainable is therefore a direct reflection of strong institutions in society that addresses each of these factors. When economic policy and associated regulations effectively balance one another each of these factors can allow for positive contributions economically, thereby driving growth. Central to this task, however, is reliable mechanisms to implement and monitor policy, while effectively enforcing regulations.

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SteamLouis
Post 3

There are so many different factors affecting economic growth, it's unbelievable. For example, I didn't know that security and political stability are also prerequisites for economic growth. This makes sense why some of the poorest nations are also some of the most conflict-ridden and unstable. It's not just because resources are wasted in conflict, it's also that investors do not invest in countries that are unstable. It's just bad for economic growth.

burcinc
Post 2

@bluedolphin-- I'm not an expert on this topic but I took several economy courses last year. As far as I understand, both of those issues affect economic growth.

One is the value of the currency or exchange rates as you mentioned. If a currency has low value in comparison to other currencies, it means that there are disadvantages when it comes to trade and investment. More of the national currency will be required to purchase from a country with a more valuable currency. On the other hand, currency with less value may make the country a more desirable place for business for foreign firms and investors.

The amount of money in the Federal Reserve is important too. Actually, what's important is how much money the reserve puts out into the economy. This directly impacts the value of money. Sometimes, the Federal Reserve just prints more money and puts it out there to fight inflation. But these are quick fixes that tend to cause more problems in the long term.

bluedolphin
Post 1

Can anyone tell me more about currency and how it affects economic growth? Are we talking about exchange rates or are we talking about how much money the Federal Reserve has?

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