The external balance of trade is the most essential of all the components that make up a country’s GDP. When the total value of products and services sold by local producers to foreign countries surpasses the total value of foreign goods and services purchased by domestic consumers, a country’s GDP rises. A country is said to have a trade surplus when this happens.
What variables contribute to GDP growth?
The growth of the Gross Domestic Product (GDP) has a direct impact on businesses. Firms can be a little more aggressive and grow with the economy in an expanding economy with growing GDP, however businesses in a shrinking economy with negative GDP growth must dramatically cut spending and refocus on revenue stream, market, and strategy. Understanding important elements that drive GDP growth will be beneficial to business management.
Labor productivity and total hours worked by a country’s labor workforce have the greatest impact on GDP growth. (GDP is calculated by multiplying labor productivity by the size of the labor force.) The money earned by one labor-hour in the country is known as labor productivity. It indicates that as labor productivity rises, so does real GDP per person (provided hours worked in a year do not decrease). The rising work force is responsible for the increase in total hours worked. It means that as the labor force shrinks, the actual GDP shrinks as well (provided gains in productivity are higher than the reduction in the size of the labor work force). We can attain quicker real GDP growth if both worker productivity and the size of the labor force expand at the same time.
Now the question is how to boost labor productivity. The simple answer is that we increase labor productivity by saving and investing in physical capital (plants, equipment, and machines that generate revenue and increase revenue output per worker) and developing human capital (improving the skill and knowledge of the workforce or people who will enter the workforce). It means that investing in people’s education and training can help them work more efficiently. We also see increases in labor productivity as employees become more comfortable in their daily routines (troubleshooting problems faster and proactively addressing issues) and hence boost production (or GDP).
Another important component that must be included into a country’s culture if it is to continue to improve worker productivity is innovation. Building and strengthening the country’s education system around innovation is what innovation entails. This entails both public and private sector institutions investing in research and development. The development of new technology will boost productivity. (This means that top-notch school and college education, as well as excellent universities with a strong concentration on R&D, will be critical to a country’s competitiveness.) Consider how information technology has advanced (or revolutionized) in the previous 20 years, helping people and businesses to be more productive (new technologies emerged in businesses based on powerful internet, network, communication tools, making business more productive). Humans have multiplied their economic production thanks to advances in science and technology. For example, due to the introduction of new manufacturing methods and technology, outputs of food grains and other items grew by a factor of ten).
Faster GDP growth is also aided by good infrastructure. With stronger infrastructure, goods are moved quickly from one location to another, enhancing our production. Entrepreneurs turn R&D insights into real-world business products. As a result, a culture that encourages entrepreneurship aids GDP growth.
The size of our workforce is another important factor that has a significant impact on actual GDP. The size of the workforce in many nations is reducing (particularly in European countries) as a result of negative demographic shifts, putting tremendous strain on the growth of real GDP in these countries. On the other hand, in nations such as China and India, the big workforce has become a significant strength (technology has helped enhance workforce productivity along with the huge world market available to the economies due to removal of trade barriers). If the workforce in these countries is educated and skilled, this workforce will become even more advantageous to these countries. It’s no surprise, then, that China and India are currently spending heavily in labor education and training. Many industrialized economies’ declining workforces will continue to be a source of concern in terms of economic growth. The ancient belief that a lower population is preferable because fewer people put less strain on limited natural resources and hence share a larger share of the fixed size of the economic pie (Malthusian theory) is increasingly being called into doubt. Science and technology innovation has enlarged the size of the economic pie for everyone. The revolution in agriculture production brought about by improved seeds, fertilizers, pesticides, and new farming methods allowed agriculture outputs to be multiplied several times. New technologies have enabled the introduction of new products to the market that have increased productivity. Automobiles, computers, other IT equipment (network, phones), new medical technologies, and new medicines, for example, have enabled unrestricted economic growth. In industrialized economies, innovative pollution management measures have helped to minimize pollution in water and air, and progress has been made toward achieving long-term environmental performance. Alternative energy sources such as solar, wind, nuclear, and hydrogen are being investigated. It appears that as long as new technologies exist, new products will continue to enter the market and be purchased by consumers, allowing economic output to rise. Some countries are unable to profit from this expansion due to their shrinking populations. As a result, these economies’ overall growth rates are either flat or negligible.
The key question is whether this never-ending growth has a limit due to deteriorating environmental conditions (global warming) or other natural resource constraints. Again, it appears that human beings will continue to find ways to thrive while also managing environmental challenges, owing to their inquisitiveness, bravery, and enterprising nature. Labor productivity will continue to rise if this is true. If this is the case, the size of the workforce will be a major determinant of real GDP growth. It means that for countries with a diminishing workforce, one viable answer is to encourage their current population to expand their workforce (by providing financial incentives to have children) while also encouraging legal immigration of talented and educated workers.
Immigration has long been a political and social concern in the United States. Yes, illegal immigration must be prevented, otherwise the new country will have law and order issues. From the standpoint of economic growth, legal immigration may be beneficial. For these countries with falling populations, immigration of skilled and educated workers will be a huge benefit, and they will be able to boost GDP growth with this approach. Still, some natives may be concerned about the social implications of the expanding immigrant population. Locals may believe that competent and less expensive immigrants are stealing their employment, producing social instability and emotional prejudices against lawful immigration. Though immigration policy in the United States helped the United States gain a significant competitive advantage over other countries in terms of research and development (R&D) and the development of new technologies in the twentieth century, the issue of immigration must be handled carefully (by taking good care of those who may be displaced to other jobs as a result of immigration). These displaced workers must receive proper training and placement assistance in order to locate alternative employment prospects based on their individual comparative advantage).
In conclusion, enhancing worker productivity and expanding the workforce can help to maintain or boost real GDP growth. Savings and investments in physical and human capital can help to boost worker productivity. It implies that we must invest in people’s training and education. We must invest in research and development as well as new technology. Entrepreneurship must be encouraged. We must also invest in infrastructure and develop and maintain effective ways of transportation (roads, bridges, and rail and sea transportation). Finally, we must increase the size of our personnel in a manner that is both acceptable and prudent.
How can you boost GDP growth?
- AD stands for aggregate demand (consumer spending, investment levels, government spending, exports-imports)
- AS stands for aggregate supply (Productive capacity, the efficiency of economy, labour productivity)
To increase economic growth
1. An increase in total demand
- Lower interest rates lower borrowing costs and boost consumer spending and investment.
- Increased real wages when nominal salaries rise faster than inflation, consumers have more money to spend.
- Depreciation reduces the cost of exports while raising the cost of imports, increasing domestic demand.
- Growing wealth, such as rising house values, encourages people to spend more (since they are more confident and can refinance their home).
This represents a rise in total supply (productive capacity). This can happen as a result of:
- In the nineteenth century, new technologies such as steam power and telegrams aided productivity. In the twenty-first century, the internet, artificial intelligence, and computers are all helping to boost productivity.
- Workers become more productive when new management approaches, such as better industrial relations, are introduced.
- Increased net migration, with a particular emphasis on workers with in-demand skills (e.g. builders, fruit pickers)
- Infrastructure improvements, greater education spending, and other public-sector investments are examples of public-sector investment.
To what extent can the government increase economic growth?
A government can use demand-side and supply-side policies to try to influence the rate of economic growth.
- Cutting taxes to raise disposable income and encourage spending is known as expansionary fiscal policy. Lower taxes, on the other hand, will increase the budget deficit and lead to more borrowing. When there is a drop in consumer expenditure, an expansionary fiscal policy is most appropriate.
- Cutting interest rates can promote domestic demand. Expansionary monetary policy (currently usually set by an independent Central Bank).
- Stability. The government’s primary job is to maintain economic and political stability, which allows for normal economic activity to occur. Uncertainty and political polarization can deter investment and growth.
- Infrastructure investment, such as new roads, railway lines, and broadband internet, boosts productivity and lowers traffic congestion.
Factors beyond the government’s influence
- It is difficult for the government to influence the rate of technical innovation because it tends to come from the private sector.
- The private sector is in charge of labor relations and employee motivation. At best, the government has a minimal impact on employee morale and motivation.
- Entrepreneurs are primarily self-motivated when it comes to starting a firm. Government restrictions and tax rates can have an impact on a business owner’s willingness to take risks.
- The amount of money saved has an impact on growth (e.g. see Harrod-Domar model) Higher savings enable higher investment, yet influencing savings might be difficult for the government.
- Willingness to put forth the effort. The vanquished countries of Germany and Japan had fast economic development in the postwar period, indicating a desire to rebuild after the war. The UK economy was less dynamic, which could be due to different views toward employment and a willingness to try new things.
- Any economy is influenced significantly by global growth. It is extremely difficult for a single economy to avoid the costs of a global recession. The credit crunch of 2009, for example, had a detrimental impact on economic development in OECD countries.
In 2009, the United States, France, and the United Kingdom all went into recession. The greater recovery in the United States, on the other hand, could be attributed to different governmental measures. 2009/10 fiscal policy was expansionary, and monetary policy was looser.
Governments frequently overestimate their ability to boost productivity growth. Without government intervention, the private sector drives the majority of technological advancement. Supply-side measures can help boost efficiency to some level, but how much they can boost growth rates is questionable.
For example, after the 1980s supply-side measures, the government looked for a supply-side miracle that would allow for a significantly quicker pace of economic growth. The Lawson boom of the 1980s, however, proved unsustainable, and the UK’s growth rate stayed relatively constant at roughly 2.5 percent. Supply-side initiatives, at the very least, will take a long time to implement; for example, improving labor productivity through education and training will take many years.
There is far more scope for the government to increase growth rates in developing economies with significant infrastructure failures and a lack of basic amenities.
The potential for higher growth rates is greatly increased by providing basic levels of education and infrastructure.
The private sector is responsible for the majority of productivity increases. With a few exceptions, private companies are responsible for the majority of technical advancements. The great majority of productivity gains in the UK is due to new technologies developed by the private sector. I doubt the government’s ability to invest in new technologies to enhance productivity growth at this rate. (Though it is possible especially in times of conflict)
Economic growth in the UK
The UK economy has risen at a rate of 2.5 percent each year on average since 1945. Most economists believe that the UK’s productive capacity can grow at a rate of roughly 2.5 percent per year on average. The underlying trend rate is also known as the ‘trend rate of growth.’
Even when the government pursued supply-side reforms, they were largely ineffective in changing the long-run trend rate. (For example, in the 1980s, supply-side policies had minimal effect on the long-run trend rate.)
The graph below demonstrates how, since 2008, actual GDP has fallen below the trend rate. Because of the recession and a considerable drop in aggregate demand, this happened.
- Improved private-sector technology that allows for increased labor productivity (e.g. development of computers enables greater productivity)
- Infrastructure investment, such as the construction of new roads and train lines. The government is mostly responsible for this.
What are the four variables that influence GDP?
Personal consumption, business investment, government spending, and net exports are the four components of GDP domestic product. 1 This reveals what a country excels at producing. The gross domestic product (GDP) is the overall economic output of a country for a given year. It’s the same as how much money is spent in that economy.
What are the five most important factors that influence economic growth and development?
Many major economic empires have risen and fallen throughout history. We have enough empirical evidence to assess what drives economic growth, it is safe to state. We’ll look at some of the key elements that contribute to economic growth in this post.
Natural resources are the primary driver of economic development. It greatly facilitates economic progress. Consider the situation of Dubai or other Middle Eastern countries. The fact that they have an abundance of oil resources has literally defined their economies. Other countries, such as Singapore, have a good natural harbor and have thus become important transit hubs. Other countries have natural resources such as coal, iron ore, and even arable land.
Locations with harbors grew tremendously at a period when shipping was strategic. Since energy now effectively controls the world, any deposits of fossil fuels or other energy sources significantly boost a country’s economic strength.
People were created with the intention of trading with one another. That is simply the natural order of things, or as things should be. Some repressive countries attempt to curtail this liberty. Trading is restricted due to the imposition of rules and constraints. This could assist a small group of individuals while harming others. It could, however, nearly never benefit the entire country.
Economic superpowers have long been known as global trading partners. They gain power not because they are isolated, but because they are indispensable in trade. The historical record is unequivocal. Superpowers have always followed and will continue to pursue free trade policies.
It’s worth noting that countries like the United States and the United Kingdom only developed after adopting a free-trade policy. As protectionism became more prevalent, the country’s economic strength decreased.
Technology has always been critical to economic development. Technological advancements ushered in the industrial revolution. Since then, humanity has never looked back. Only the ways in which technology was used varied over time. Technology continues to drive job and corporate growth, from manufacturing to services to social media. As a result, countries that grow their technological prowess develop far faster than others.
Take, for example, Germany. The country was destroyed twice during World Wars I and II, and it has also been occupied by communists for decades. Despite this, its economy is far more developed than that of its European counterparts, who have not seen quite as much turbulence. This achievement, according to analysts, is due to Germany’s concentration on technological progress.
Depending on how they are used, a country’s human resources can be a blessing or a curse. Consider the scenario of a country such as India. The population is mind-boggling. A significant share of the population is of working age. In addition, the majority of them have a strong education and work experience.
This is what has allowed an otherwise impoverished country like India to become one of the world’s fastest expanding economies. If the population were not educated, these human resources that have made India an IT giant could have resulted in large-scale criminality!
Any country wishing to develop economically must ensure that its residents have access to high-quality education at a reasonable cost.
Last but not least, there is the Chinese development model. China has made significant investments in massive infrastructure projects. Once they were up and running, these projects provided jobs and boosted the economy. Furthermore, because they were infrastructure projects, they paid for themselves over time.
China now boasts some of the world’s lowest manufacturing costs. The large-scale infrastructure has made this possible. China has the cheapest electricity of any country on the planet. Chinese carriers can also deliver goods across continents for a low cost. As a result, China has become the world’s largest exporter and second-largest economy.
Why are Countries Unable to Grow ?
The components that contribute to growth are pretty simple. As a result, if governments so desire, they can create a well-defined road to growth. However, the majority of people are unable to do so!
This is due to the fact that economic growth is a result of internal factors. Most people seek to grow at the expense of one another in most countries. As a result, economic policies are based on what is good for a specific group of people who have the capacity to influence this policy rather than what is good for the economy.
In most countries, it is the bickering between the haves and the have-nots that hinders a cooperative solution that would benefit all parties involved.
How can the economy be improved?
- Consumer spending and company investment are generally the driving forces behind economic growth.
- Tax cuts and rebates are used to give money back to consumers and encourage them to spend more.
- Deregulation loosens the laws that firms must follow and is credited with spurring growth, but it can also lead to excessive risk-taking.
- Infrastructure funding is intended to boost productivity by allowing firms to function more effectively and create construction jobs.
What causes a drop in GDP?
Shifts in demand, rising interest rates, government expenditure cuts, and other factors can cause a country’s real GDP to fall. It’s critical for you to understand how this figure changes over time as a business owner so you can alter your sales methods accordingly.
What are GDP’s five components?
(Private) consumption, fixed investment, change in inventories, government purchases (i.e. government consumption), and net exports are the five primary components of GDP. The average growth rate of the US economy has traditionally been between 2.5 and 3.0 percent.
What are the three most important factors that influence economic growth?
The contribution of each of these three elements to the economy is measured by growth accounting. As a result, the percentage of a country’s economic growth that comes from capital, labor, and technology can be split out.
Both conceptually and empirically, technological advancement has been proved to be the primary driver of long-run growth. The reason for this is actually fairly simple. According to the law of diminishing returns, the additional production generated by adding one extra unit of capital or labor will eventually drop if other input parameters remain constant. As a result, a country’s long-term growth cannot be sustained by simply acquiring more wealth or labor. As a result, technical advancement must be the primary driver of long-term growth.
This essay delves deeper into the relationship between historical economic growth sources and future performance in developed countries, particularly in the aftermath of the Great Recession. We used data from the Conference Board’s Total Economy Database to execute the following growth accounting exercise for nine major advanced economies1 from 1990 to 2013:
The contributions of capital stock, labor inputs, and technical developments to per capita output growth are first split out for each country (represented by total factor productivity, or TFP).
2 After that, we split our data into two periods: before and after the financial crisis. This helps us to see if growth drivers are linked to a country’s economic performance, particularly during or after a recession. Finally, as shown in the figures below, we plot average GDP growth following the financial crisis versus the average contribution to production growth of labor, capital, and TFP before 2007.
In developed economies, the conclusion demonstrates a favorable link between previous TFP and future growth. Close to 0.60 was the correlation coefficient. Specifically, countries whose growth was fueled by TFP prior to the crisis had higher output growth afterward. However, the post-crisis connections between GDP growth and capital or labor contribution to GDP were both negative. There was a -0.68 correlation between output growth and labor, and a -0.30 correlation between output growth and capital. The negative connections show that countries whose growth is based on capital or labor accumulation are less likely to thrive in the future, particularly during economic downturns. Our basic exercise also implies that an economy’s health is determined by the source of growth rather than the growth itself.
This simple exercise indicates that a country with significant TFP-driven growth prior to the Great Recession tended to do well relative to other countries following the recession, in addition to the role TFP plays in promoting long-run growth.
What is meant by the word “investment?
What exactly do economists mean when they talk about investment or company spending? The purchase of stocks and bonds, as well as the trading of financial assets, are not included in the calculation of GDP. It refers to the purchase of new capital goods, such as commercial real estate (such as buildings, factories, and stores), equipment, and inventory. Even if they have not yet sold, inventories produced this year are included in this year’s GDP. It’s like if the company invested in its own inventories, according to the accountant. According to the Bureau of Economic Analysis, business investment totaled more than $2 trillion in 2012.
In 2012, Table 5.1 shows how these four components contributed to the GDP. Figure 5.4 (a) depicts the percentages of GDP spent on consumption, investment, and government purchases across time, whereas Figure 5.4 (b) depicts the percentages of GDP spent on exports and imports over time. There are a few trends worth noting concerning each of these components. The components of GDP from the demand side are shown in Table 5.1. The percentages are depicted in Figure 5.3.