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Economic Growth

Economic growth is the amount of production in a country or region over a certain period of time. It is
measured through the gross domestic product (GDP) and is considered to be one of the surest signs of a
countrys overall health. It is defined by economists in different ways
According to Maddison The raising of income level is generally called economic growth in rich
countries
According to Schumpeter Growth is a gradual and steady change in the long run which comes about by
a gradual increase in the rate of savings and population.
According to Kindleberger Economic growth means more output
According to Friedmann Growth is an expansion of system in one or more dimensions without a change
in its structure
Factors Responsible for the Change Economic Growth Rate of a Country
Economic growth is the potential of a country to produce more. Technically, a country does not actually
have to create more products or services for economic growth to increase. However, many financial
organizations look at the gross national product or other examples to gauge how much the economy has
grown. Several major can influence this growth depending on the nation.
Natural Resources
The availability of natural resources allows a nation to produce material goods for its own use or foreign
trade. Food crops qualify as a natural resource. A surplus of food allows citizens to take time away from
food production and produce consumer goods--or act as consumers themselves. Non-food natural
resources, such as mineral deposits, can contribute to economic growth by providing the material for
technological innovation, the next factor in economic growth.
Any time a resource expands in some way, the economy tends to grow as a result. Resources can
expand in several ways. Someone might create a new process that makes a more refined natural
resource than before. A company might discover a new source of natural gas, or acquire a piece of land
with rich timber. More resources lead to more economic growth.
Technological Progress
Technological process is a very important factor of faster economic growth. It means that
The same amounts of the factors of production can produce a higher output;
New products will be developed , thus adding to output growth
There can also be technical progress in the labour force .If workers are better educated and better
trained they will be able to produce more. For example, if there is a fault in the production process, a
skilled worker will be able to deal with it quickly, whereas an unskilled one might have to call for a
superior instead.
Technological progress can be divided into three types :
Capital saving technical advance that uses less capital and the same amount of labour per unit of
output
Neutral technical advances that require labour and capital in the same proportions as before,
using less of each per unit of output
Labour saving technical advance that uses less labour and the same amount of capital per unit of
output
According to economist Joseph Schumpeter, new technology and innovation destroy old markets and
create new ones. Fostering innovative individuals and companies, therefore, breeds an environment
that is ripe for economic growth. The production of products and services, and the selling of them, are
core drivers of growth in developed economies.
Social and Financial Capital
Capital generally helps to increase economic growth, but there are two important and intangible types
of capital not related to resources. These are:
Human capital : It is the social aspect of the economy. It means the value that humans bring to
the marketplace. Nations that invest in the health, education, and training of their people will
have a more valuable workforce. Human capital includes education, training, skills, and
healthcare of the workers and the value that they bring to the countrys economy. Examples:
computer/reading/writing/math skills, talents in music/sports/acting, ability to follow
directions, ability to serve as group leader & cooperate with group members. A countrys
literacy rate highly impacts the human capital. Educated people that have training are more
likely to contribute to technological advances, which leads to finding better uses of natural
resources & producing more goods.
Financial capital : It refers to the direct funds that companies can use. There must be sufficient
capital .The purchase of new capital equipment requires finance , which must be available from
retained profits of firms or well organized capital market (or ,in the case of government
investment , from taxation )
Government Policy
Government policy also plays a very important role in economic growth. Governments can encourage or
discourage economic growth through taxes, tariffs and financial regulations. Governments also control
what types of international resources businesses can access, as well the types of technology or
workforces companies can use abroad.
For better economic growth of a country, the government uses a number of policy tools . These include
monetary policy , fiscal policy , prices and incomes policy , exchange rate policy ,and external trade
policy .
These policy tools are not mutually exclusive and a government might adopt a policy mix of monetary
policy, fiscal policy and exchange rate policy in an attempt to achieve its economic objectives . If there is
an alternative economic objective (for example restoring a balance of payments equilibrium)
government policy might suppress growth.
Land
Land must be available, and there must also be a suitable infrastructure (roads, railways, the
communications network and so on) to support commercial activity.
External Trade
An improvement in terms of trade (the quantity of imports that can be bought in exchange for a given
quantity of exports) means that more imports can be bought or alternatively a given volume of exports
will earn higher profits. This will boost investment and hence growth.
The rate of growth of rest of the world is important for an economy that has a large foreign trade sector.
If trading partners have slow growth, the amounts of exports a country can sell to them will grow only
slowly, and this limits to the countrys own opportunities for investment and growth.
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, i.e. 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.
Ease of Doing Business (Entrepreneurship)
People who take the risk to start and operate a business are called entrepreneurs .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.
Social or Non-Economic Factor
Like economic factors, as discussed above, non-economic factors also play a vital role in economic
growth. Prof. Lewis in his book Theory of Economic Growth writes Amongst the conditions of
economic growth the attitudes of the people towards material gains and rewards, and the spirit of
experimentation and rationalism also play their role. Economic growth (development) is likely to be
stimulated in those economies where people do not have ascetic attitude towards life, and believe in
increase in productivity of material goods either for the sake of their enjoyment or for social prestige
and standing. Similarly, economic growth is accelerated by new developments in technologies and
scientific discoveries that are made possible by a spirit of experimentation, which is rooted in human
reason. Economic growth is also governed by the growth of impersonal relationships, which is necessary
to enable the people to carry on business activity with other people, without any regard for kinship,
nationality or belief.
There are certain social and institutional factors which also affect the development in a country. They
consist of cultural values, beliefs of the people, attitudes of the people, environment of the people,
educational standards of the people, the inheritage of the people, the civilization and cultural
tendencies of the people, the habits and outlook of the people, the business practices of the people, the
lending and borrowing practices of the society, the attitude of banking systems towards small
borrowers, the behavior of the people in respect of inventions and innovations, the administrative
practices in a country, and the political setup of the countries.
Corruption and Poor Governance
This is a crucial factor for many developing countries. High levels of deeply embedded corruption and
bureaucratic delays can harm growth in many ways like inhibiting inward investment and also making it
more likely that domestic businesses will invest overseas rather than at home. Governments need a
stable and effective legal framework to collect taxes to pay for public services. If a legal system cannot
protect private property rights then there will be less research and development & innovation.
References:
http://www.slideshare.net/HeatherP/four-factors-of-economic-growth-10375773
http://www.ehow.com/list_6706424_major-factors-influencing-economic-growth.html
http://www.ehow.com/list_6503083_factors-country_s-rate-economic-growth.html
http://economicsexposed.com/social-or-non-economic-factors-of-economic-growth/
http://www.wisegeek.com/what-are-the-different-ways-to-increase-economic-growth.htm
Introduction to Economics and Finance (CA Module B Paper B3 Study Text)

Economic Growth Rate of Pakistan:
According to the Pakistan Economic Survey 2012-13, the economic rate of Pakistan is 3.6%.
Source:
http://www.finance.gov.pk/survey/chapters_13/01-Growth%20and%20Investment.pdf

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