Factors Affecting Economic Growth

Factors Affecting Economic Growth


Economic growth is a shift in an economy's production of products and services, either increasing or decreasing in value. It must be measured because decisions and policies made by the public and commercial sectors need to have a foundation. Growth is correlated with all significant parts of the economy, including tax receipts, interest rates, inflation and expectations, employment, foreign trade, and so forth. 
Without tracking growth, both public and private behavior are irrational. For instance, the growth and inflation rates affect investment decisions. Because of this, India's Central Statistics Office (CSO), currently known as the National Statistical Office, forecasts growth rates weeks before the Union Budget is announced. This allows for the logical forecasting of revenues and expenses, which in turn affects decisions made by the private sector.


Political, social, and cultural influences, among others, all have an impact on economic growth, which is a highly complicated phenomenon. These components are listed below:

Factors Affecting Economic Growth

Economic variables

Natural Resources

•    The most significant factor determining the growth of an economy is its access to natural resources.
•    Natural resources include things like land area, good soil, abundant forests, a healthy river system, mineral and oil resources, a good climate, and so on.
•    Natural resource wealth is essential for economic expansion. A nation without sufficient natural resources might find it difficult to advance quickly.

Capital Formation

•    A country's productive capacity and worker efficiency are increased through capital formation, which is the process by which a community invests its savings in capital goods like buildings, machinery, and other assets. This process also ensures a greater flow of products and services throughout a nation.

Technological Advancement

•    Research into the application of novel and improved manufacturing techniques, or the enhancement of current techniques, is the main component of technological growth.
•    Technology advancement can occasionally increase the availability of natural resources. But generally speaking, technical advancement boosts productivity.


•    The capacity to spot fresh investment opportunities is a prerequisite for entrepreneurship, as is the desire to take calculated risks and finance emerging and expanding company entities.

Human Resource Development

•    The rate of economic growth depends heavily on the population's quality.
•    Therefore, it is vitally beneficial to invest in human capital through social, medical, and educational programs.

Population Growth

•    Population growth expands the market for products and services, which leads to a rise in the labor supply. Therefore, more labor generates more output, which a bigger market can consume.
•    As a result of this procedure, output, income, and employment keep growing, and economic growth gets better.

Social Overheads

•    Another significant factor influencing economic growth is the availability of social overheads such schools, universities, technical institutions, medical colleges, hospitals, and public health facilities.
•    These facilities promote the health, productivity, and responsibility of the working people.


Political Factors

•    Economic development in the modern era depends on political stability and effective governance.
•    Faster economic growth is achieved by having a stable, powerful, and effective government, as well as by having honest leadership, transparent policies, and effective implementation of those policies.

Psychological and social influences

•    As education develops and cultures change from one civilization to another, social elements such as social attitudes, social values, and social institutions change.
•    The rise of new entrepreneurs is a result of modern philosophy, beliefs, and attitudes that lead to new discoveries and breakthroughs.


•    Education is now largely recognized as the main tool for development. Countries with widespread access to education have made more advancements.
•    The desire to improve oneself materially
•    Economic development requires the desire for material advancement, which is a crucial condition.
•    Societies that prioritize self-gratification, self-sacrifice, and faith in fate limit risk and enterprise, which results in a stagnant economy. 
Factors Affecting Economic Growth


•    When a country's population is growing faster than its total output is growing, economic growth is possible.
•    To accomplish economic growth, a nation's human resources must be large enough and possess the requisite knowledge and skills.
•    Natural resource utilization and exploitation depend on human resource skills and talents, the technology employed, and the availability of funding. A nation's economy advances when it has a highly educated workforce and a wealth of natural resources.
•    Capital formation raises the amount of capital available per worker, thus increasing the capital-to-labor ratio. As a result, labor productivity increases, resulting in higher output and economic expansion.
•    With less resources available, production can be increased thanks to technological innovation. Countries that have worked on technology development expand more quickly than nations that haven't given it as much attention. The development of an economy also depends on the choice of the right technology.
•    The social and political environment of a nation has a significant impact on its economic development.
•    Customs, traditions, attitudes, and beliefs are examples of social elements that all have a big impact on how fast an economy grows.
•    For instance, a community with traditional beliefs and superstitions is reluctant to adapt modern lifestyles. Achieving becomes challenging under this circumstance.
•    In addition, political aspects like government involvement in policy development and implementation have a big impact on economic growth. 


A nation's national income and employment levels benefit from sustained economic expansion, which raises living standards. Additionally, it significantly contributes to improving government finances by raising tax collections. A nation's economy can flourish if its strengths and limitations are correctly identified.

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