Economic Growth - Definition, Determinants, Measures

What is Economic Growth?

Economic growth means an uninterrupted increase in per capita national output or net national product over a long period of time. It can be implied that the rate of increase in total output must be greater than the rate of population growth. Economic growth implies a considerable and sustained increase in per capita income with or without an increase in population - if output and population grow at the same rate, there would no increase in per capita income which means no improvement in the standard of living; such growth is considered to be same as stagnation in the economy. And if there is an increase in per capita income as a result of faster decrease in population than the decrease in output perceived as a general decay in the economy: there is no growth despite increase in per capita income.

Economic growth refers to increase over time in a country's real output of goods and services- or more appropriately product per capita.

Economic growth highlights the increase of real output of goods and services over time. Here output is measured via gross national product (GNP). However, the growth in input could be increased by using larger inputs such as capital and labour. The national output should be comprised of goods and services which satisfy the maximum wants of the maximum number of people. Short-run increase in output followed by a similar decrease in the output does not mean economic growth. Also, seasonal, occasional and cynical increase in output do not satisfy the conditions of sustained economic growth. 

Economic growth can be defined as a rate of expansion that can move an underdeveloped country from near subsistence mode of living to substantially higher levels in a relatively short period of time, for instance, in decades rather than centuries. For nations already advanced economically, it will mean a continuation of existing rates of growth.

Economic growth means an uninterrupted increase in per capita national output or net national product over a long period of time.

Determinants of Economic Growth

There are four most important determinants of economic growth-

(1) The Quality of Human Resources,

(2) Natural resources,

(3) Formation of Capital

(4) Development of Technology/ Technological Development.

The above mentioned four factors are considered the "four wheels" of economic growth. The social and political make the fifth factor.

Human Resources and its Quality

Human resource of a country is the most crucial factor in its economic growth. Human resource is comprised of the available labour force and its quality. Quality of labour depends on the level of its education, training, skills and its inventive and innovative abilities. Quality and quantity of manpower are both equally important. The labour force along with its skill is the source of all goods and services. An appropriate combination of labour with different skills is also very important in making optimum use of human resources. 

Natural Resources

Natural Resources of any country include the area of usable land, resources on the land surface and underground. Favourable climatic and environmental conditions add to the natural resources endowments of a country. The countries with rich natural resource endowments have much larger growth potential than those lacking natural resources. However, natural resources are considered the passive factors of growth. How resources are exploited and used depends on the quality of manpower, availability of capital and technology. The countries endowed with rich natural resources and a highly skilled motivated manpower can do miracles in economics growth.

Capital Formation

Capital is defined as man-made means of production. It comprises machinery, plant and building, means of transport and communication, electricity, plants and social overheads like roads, railways, schools, colleges, hospitals, etc. Creating man-made means of production is known as capital formation or capital accumulation. Capital formation enhances productivity of labour. In other words, a larger quantity of goods and services per unit of time. This means a high growth rate. In economic slang, capital formation means sacrificing current consumption and saving incomes to be invested in capital goods (machinery, plant, building and equipment etc.) In general, the countries with a high rate of saving and investment have a higher rate of economic growth.

Technology

Technology refers to scientific methods and techniques of production. In effect, technology means the amount of machinery and technical equipment used with a given amount of labour. Technological development can be defined as improving the technique of production through research and innovations. Technologies development results in a larger output for a given amount of men, materials and time. Evidence available in the economic history shows that countries which achieved technological development have made longer strides in the field of economic growth.

Social and Political Factors

Social factors like customs, traditions, beliefs, institutions, social(communal) harmony, and attribute towards the material life and well being, determine, to a considerable extent, the pace of economic growth. The form of government and its economic roles and policies matter to a great extent in determining the level and rate of the economic growth of a country. Political stability has always proved conducive to economic growth by encouraging industrial endeavours. 

Measures of Economic Growth

Economists have traditionally discussed two measures of economic growth-

(1) Increase in Gross National Product (GNP) or Gross Domestic Product (GDP);

(2) Increase in per capita income (or what is the same thing, per capita product).

1. Rise in GNP or GDP

Some economists have defined economic growth in terms of national income aggregates. They assert that economic growth is a process whereby an economy's gross national product (GNP) increases over a long period of time.

In a closed economy, no distinction is to be made between gross national product and gross domestic product, whereas, in an economy open to foreign trade, national product may be greater or less than domestic product depending upon the net inflow or outflow of income. A country may record an increase in its GNP if its people have invested massive capital outside the country and earn big profits from there. But this does not mean that the country has developed. Of the two variables, GDP will give a more accurate picture of economic growth as compared to GNP. It is evident that in a country where the population grows at a faster rate than the rate of increase in GDP, product per capita will decline. Obviously, this cannot be treated as economic growth. Therefore simply an increase in GDP does not imply growth. What is important is how the per capita product (or per capita income) behaves.

2. Rise in Per Capita Product or Income

A cross-section of economists believes that the essence of economic growth is an increase in product per head of population. A mere rise in GDP or GNP is, however, a questionable criterion for assessing the growth performance of an economy.

Economic activity involves many dimensions. In the process of economic growth, all the variables do not move in the same direction and with the same speed. GDP or GNP may rise, while per capita product may decline, or productivity per labour unit may increase, while per capita consumption may go down. Per capita consumption may prove to be a strategic variable if the purpose of the study is to measure actual changes in the living standards of the people. On the contrary, if the purpose is to have an estimate of the capacity of the economy to provide income which may or may not be actually consumed, per capita consumption will be of little use. Here, per capital product, will prove to be a better index.

Although increase in per capita income (or per capita product) is universally accepted as a measure of economic growth, it suffers from some serious limitations as would be clear from the discussion below:

1. The per capita income figure does not indicate anything about the types of goods and services produced in a country. Besides that, it fails to measure the amount of welfare which people derive from the use of these goods and services.
2. Numerous goods and services do not pass through the market and are therefore not included in the national income estimates.
3. The estimates of national income and the rate of increase in it tell us nothing about the exploitation and waste of natural resources. 
4. The rate of increase in national income doest not throw any light on the distribution of income in the country. In all the countries where large income inequalities exist, a major part of national production is appropriated by a small number of persons. If a part of the income of this class is transferred to those households which are below poverty line, the level of economic welfare show great improvement.
5. National income figures of different countries cannot always be legitimately used for comparing their economic welfare. Difficulties arise in making comparison of per capita national income of different countries on account of conceptual differences, exchange rate problem, and the great differences in domestic relative price structures among countries. It is the reason why growth rates measured in terms of per capita income for the various countries should be compared only after making the necessary adjustments which are generally quite difficult to make.
6. Relative price structures are not the same in all countries. This creates problem in making comparisons of the per capita national income in different countries.

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