What Is Economic Growth: Important, Measurement and Sustainability.

What Is Economic Growth?

Economic growth is the process by which per capita income rises over time. Growth theory attempts to model and understand the factors behind this process. It is a particularly challenging area of research because growth is extremely uneven in space as well as in time. Economic growth is usually taken to mean the growth of the value of real income or output.

To make the economy grow requires economic arrangements to change, and the cost of making these changes is an investment. This can take many different forms, for example, increasing flocks, building more or better roads, making more or better machinery, educating more people, or to a higher standard, undertaking research and development, and so on. Countries will grow faster the more of their incomes they devote to investment and the more efficient that investment is.

For a long time, however, economists have placed their emphasis on technical progress. This is because of the seemingly well-established empirical finding that taken together, investment and employment growth can account for little more than one-half of the growth of many developed economies. The residual, unexplained, part of growth is then attributed to technical progress, which, according to theory, is the discovery of new ways to increase output from given inputs of labor and capital.

economic growth

The fastest-growing countries in the world are not those with the greatest expenditures on research and development. They are those Asian countries in which wages are low and profitability and investment are both high, as businesspeople take advantage of their ability to imitate and catch up with the more developed countries in a relatively free market system. They have also benefited through a large transfer of workers from agriculture to manufacturing and other enterprises.

Why Is Economic Growth Important?

Economic growth is the most powerful instrument for reducing poverty and improving the quality of life.

Growth can generate virtuous circles of prosperity and opportunity. Strong growth and employment opportunities improve incentives for parents to invest in their children’s education by sending them to school.

This may lead to the emergence of a strong and growing group of entrepreneurs, which should generate pressure for improved governance. Strong economic growth, therefore, advances human development, which, in turn, promotes economic growth.

Economic growth is important because it generates job opportunities and hence stronger demand for labor, the main and often the sole asset of the poor. In turn, increasing employment has been crucial in delivering higher growth. Strong growth in the global economy over the past 10 years means that the majority of the world’s working-age population is now in employment.

Economic growth is not fundamentally about materialism. Nobel laureate Amartya Sen has described economic growth as a crucial means for expanding the substantive freedoms that people value. These freedoms are strongly associated with improvements in general living standards, such as greater opportunities for people to become healthier, eat better and live longer.

There is overwhelming evidence that higher incomes lead to a better quality of life, not least in terms of the Millennium Development Goals on health and education. Key research findings here include the following:

• Higher levels of income reduce infant mortality. 24 India demonstrates the strength of this relationship: a 10 percent increase in GDP is associated with a reduction in infant mortality of between five and seven percent.25
• Primary and secondary school enrolment rates are positively associated with higher levels of per capita income.

It leads to improvements in nutrition and health care and allows for a more and better food to be purchased (higher incomes bring these things about).

It provides individuals with more leisure time by leading to improvements in productivity.

It improves life expectancy.

It means more goods and services can be enjoyed by a nation’s citizens, who are enjoying higher standards of living.

It lessens the burdens of scarcity, enabling nations to make more efficient use of their natural resources and other resources as well.

It supports a larger population size (we don’t have to worry about population size limiting our ability to increase output per person).

Examples of Economic Growth

Natural Resources

Natural resources include anything that exists in nature and which has exploitable economic value. The rate of economic growth increases on an increase in quantity and quality of natural resources. Examples of natural resources which can have a major effect on the rate of economic growth include fossil fuels, valuable metals, oceans, and wildlife.

Human Resources

Human resources include both skilled and unskilled workforce. An increase in the quantity and quality of the workforce increases the rate of economic growth. Here, an increase in quality refers to the improvement of skills the workers possess. When more people work, more goods and services are produced and when more skilled workers do a job, they produce high-value goods and services.

Capital Goods

Capital goods are tangible assets such as plant and machinery that can carry out processes which result in the production of other goods and services. Capital goods require big investments initially but they increase production and growth rate in future periods.


Technology includes methods and procedures used to produce various goods and services. New technology may be invented or current technology may be improved gradually by investing in research. Better techniques once devised, allow faster production and increase the rate of economic growth.

Demand Factor

The increased supply of goods and services caused by the supply factors must be sustained by increased demand for goods and services in the economy.

Efficiency Factor

Achieving high output to input ratio is the result of efficiency. Efficiency includes both productive and allocative efficiency. High efficiency increases the growth rate when it is coupled with full employment. To achieve maximum growth rate, an economy must use its available resources in the least costly way to produce the optimum mix of goods and services and it must use its resources to the maximum extent possible.

How Is Economic Growth Measured?

The following are the criteria on how to measure economic growth:

National income – Higher the growth in national income, the higher will be the economic growth since the population will have a bigger chunk of income for distribution among themselves.

Per capita consumption – We look at it to basically distinguish between what part of income is going for savings and what part for consumption. A very high saving rate especially in developed countries can bring about recessionary conditions. And in general, too stressing too much on savings at the cost of producing essential goods can adversely impact welfare. Hence an increase in per capita consumption is seen as another measure to indicate economic growth.

Per capita Income – We incorporate population so as to take care of the increasing population. If the population increase at a higher rate than national income then of course economy will be no better off. Hence we look at per-person income which is national income divided by population.

Other factors to:

  • Government policy towards a free-market economy.
  • Availability of natural resources.
  • Availability of adequate human capital to take benefit out of natural resources.
  • Availability of technical, managerial skills.
  • Innovation
  • The social tendency towards business and a free-market economy.
  • Entrepreneurial skills of people.
  • Democratic values prevalent in a country
  • Rule of law.
  • Ease of doing business.
  • Productivity level prevalent in a country.
  • Level of corruption.
  • Level of gross domestic savings. It must be on the higher side.

What Is Sustainable Economic Growth?

Sustainable economic growth may be defined as a rate of growth that can be maintained without creating other significant economic problems, especially for future generations. Growth based on short-term public debt, rather than long-term productivity, is unsustainable.

Growth is sustainable only so long as people are becoming more productive. If you have huge leaps in productivity year after year, then 10% growth P.A. is sustainable. If there are no increases in productivity, then 1% growth can be unsustainable.

Therefore, economic growth is sustainable if we continue to switch from an industrial economy to an information (services) based one, where consumption growth is of bits of information and physical things such as people, food, and shelter are born, grown, and built sustainably.

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