Economic growth in terms of macroeconomics can have multiple interpretations and definitions. For some increase in the gross domestic product (GDP) can be an essential criterion for economic growth. For some, it might an increase in productivity and disposable income of the standard populations. Others might like to view economic growth via the prism of supply-side output like an increase in production quality and quantity. Hence given the full gamut of interpretations and implications, economic growth is influenced and moderated by a wide variety of different factors:
The demand side helps in generating the requisite threshold and incentive for factors of production to collaborate and start the wheels of the economy. In essence, demand-side factors depend on several abstract factors like preferences and culture of the people and several objective factors like disposable incomes, wages, salaries, etc. Hence following demand-side factors are the key to economic growth:
· Government spending
As the treasury loosens its purse, it leads to the increased money supply in the whole economy. This may be done via pumping in more liquid currency or by buying bonds. With targeted government spending, there is an uptick in physical infrastructure development, social welfare, and employment generation, thereby leading to an increase in economic activity. The infrastructure and services so developed by the government expenditure further lead to more private and foreign investment, hence accelerating economic growth.
· Increase in wages/real income
Since demand is the sufficient purchasing power of consumers, any change in consumers' purchasing power capacity plays a vital role in deciding economic growth. As the wages and income level goes up, people start consuming more goods and services. This increase in demand pushes producers to produce more products. This, in turn, leads to capital investment in areas like infrastructure set up, procurement of raw materials, demand for ancillary and tertiary services, etc.
All these play a significant role in economic growth as there are more opportunities for employment and entrepreneurship. In the long term, this leads to more substantial capital inflow in the economy via Foreign Direct Investment (FDI), FPI (Foreign Portfolio Investment), or institutional investment, thus propelling economic growth even more.
· Corporate and Individual tax level
Taxes have a direct impact on economic development. There are two ways to look at the whole scenario. In the first instance, the government levies a very minimal amount of tax. Hence there is higher disposable income with the general population and the corporates leading to increased retail and corporate demand. This, in turn, drives economic growth as more demand translated into more investment and employment opportunities.
On the flip, side higher tax rates ensure that the government has burgeoning coffers. This enables the government to spend more. However, one of the issues here is that since the government is not driven solely by economic and micro-conditions, this may not lead to economic growth at desired levels.
· Health of Banking and Financial sector
The banking sector's efficiency and ability in lending and mobilize savings to play a pivotal role in economic growth. The banking sector ensures the circulation of capital in the economy and helps people develop economic and financial security. Hence, the banking sector's ability to provide services to the various agents in the marketplace to ensure that capital and returns are available to the needy is one of the most critical factors governing economic growth.
In general, the banking sector's health and profitability levels as a whole are a measure of the country's economic growth. With an increased level of spending by the banks, there is an adequate level of the money supply. This leads to increased demand. On the deposit side, if the banks' deposits start to swell up, the banks can lend more freely to the corporate sector, thus pumping up demand in an indirect manner.
The supply-side factors are, in general, the long term specific. In essence, they take a given period to take shape and be executed. Some of the supply-side factors governing economic growth are:
· Availability of factors of production
The availability of factors in production at competitive rates and within the given timeframe plays a pivotal role in ensuring that the supply side matches demand. Excessive demand without the supply to satisfy would lead to price rise and black marketing for goods and services.
In particular, the availability of raw materials and land for setting up physical infrastructure plays a significant role in governing economic growth. If the availability of these two is streamlines, then it gives a sense of capital security, thus leading to enhanced production. This would, in turn, drive employment and wealth generation, thus increasing economic growth.
· Labor Productivity
The productivity of labor and the working class's skillset plays a significant role in determining economic growth. As work becomes more and more skilled, sophisticated products and services can be produced at cheaper rates. Generally, the availability of skilled labor leads to enhanced innovation and the development of breakthrough technologies. This becomes a technological edge and hence leads to increased demand for products and services globally.
Moreover, skilled labor attracts capital, and hence it leads to more inflow of capital investment. In turn, this leads to more employment for people with all skill levels, thus leading to better opportunities for such people to acquire more skills and move up the economic ladder.
· Education, healthcare, the attitude of the citizens
The citizens are probably the most critical factor governing economic growth; By having the higher skill and education levels, they can provide the skilled labor required to pump up supply. Moreover, the general health level of the people also plays a significant role in governing economic growth. A healthy country generally leads to enhanced productivity and ensures the commercial process's continuation, thus leading to higher economic growth.
Since many interrelated factors drive economic growth, it is essential to have a holistic and comprehensive mindset when designing the policies regarding factors that drive economic growth.
Sep 22, 2020