The basic fundamentals of economic growth in any region or country are a function of supply and demand. Both of these elements impact a country’s capacity for economic growth.
Even demand, where consumer spending is high on one product, will stimulate economic growth.
Any impacts on capacity in the supply chain will affect economic growth. When the average citizen has more money to spend, economic growth is stimulated.
The same concept applies to the government, as with more revenue, more opportunities to flourish exist.
Table of Contents
- What are the main factors of economic growth?
- How can a country increase demand for a product or spending?
- How does the labor market influence economic growth?
- What can a government do to help with economic growth?
- What factors influence government decisions on economic growth?
- Do citizens want strong economies?
- Are there situations where citizens don’t want strong economies?
- Does immigration play a role in economic growth?
- Do you understand economic growth better?
What are the main factors of economic growth?
The main factors of economic growth are supply and demand, and those factors are present in every framework that is concerned about growth rates. Variables that measure demand are spending, investments, government spending, and the exports and imports of that country.
Supply is dependent on the need, the productivity of the economy in its current state, and how productive the labor market is at the time.
Take for example one product, that of face masks for health purposes. In 2020, there was a rise in demand from consumers and the government.
There was also a rise in government spending on this product.
However, the labor market has been slowed in every nation in the world. Citizen spending was down as a result, but government spending went up on this one product.
This product alone isn’t going to stimulate economic growth in any one country.
However, this one product does serve as a relatable example to illustrate how important every economic factor is when a country is trying to grow and stimulate its own economy.
How can a country increase demand for a product or spending?
Increased demand at the economic level is dependent on what the consumer has available to them. That isn’t just about cash and jobs, although those are leading factors that help every economy.
Greater productivity in the labor market helps as well, and this contributes to the export and import rates of a nation.
Reduced interest rates are a sign of a healthy economy, as much as they are for the average borrower. Reduced interest rates contribute to demand by making borrowing and spending more attainable for the average consumer.
Higher wages or salaries also contribute to this factor and to a stimulated economy overall.
When consumers and consumer nations have more available to them to spend or borrow to spend, economic growth is stimulated. This leads to more complex methods of stimulating economic growth such as reducing the costs of exports and increasing the costs of imports.
Rising real estate costs also make consumers who are homeowners more confident in the economy, as they now have assets that are worth more to them than they were before those rates increased.
How does the labor market influence economic growth?
When a labor market is doing well, it impacts the average consumer, the company they work for, and the region or nation that receives goods as a result of that productivity. The average consumer has more money, the company will as well, and so will the country – when the consumer spends their money, the country profits from the exports.
Technology is a true indicator of development and economic growth. Simply put, without technology and innovation, companies make less.
Making something by hand takes more time, costs more in labor, and may not result in an efficient or desirable product.
Flexible working policies are another strong indicator of economic growth. If companies didn’t offer work-from-home options during the pandemic, a national economic disaster would have occurred in every nation.
Again, without technology, this flexible policy is not possible.
What can a government do to help with economic growth?
A government is in place in every country to create laws and enforce them. Policy is the easiest way to encourage economic growth, but so is good leadership at the helm.
When a nation’s leader wants their people to be productive citizens with jobs and credit at their disposal, the country prospers.
It is always in the best interest of every government to encourage sound fiscal policy and not just because the people want it. It’s important because the nation will need it to survive.
This includes reducing taxes, when possible, which increases the amount of income the citizenry can spend on other ways to stimulate economic growth.
Still, lower taxes will reduce a nation’s budget in the same way that less revenue in a home reduces a family’s budget. A government can also help to influence interest rates and increase the demand for domestic products.
It is not just in the best interest of a government to ensure economic growth or at least stability, it is the job description.
What factors influence government decisions on economic growth?
Developed land or areas are in their own rights indicators of growth. Infrastructure and infrastructure investments are key indicators of a developed nation. A dirt road leading to a factory doesn’t quite indicate the same economic vibe that a four-lane highway or train station does.
There are some things that will impede this, otherwise, every country in the world would have developed infrastructure. The private sector plays a key role in planning and developing infrastructure, and the government has a difficult time influencing this.
Additionally, the morale of the average employee is first boosted by the employer, and then by the government, if by the government at all.
To that end, the growth rate is better in nations where there is less development. However, growth as a function of a productive labor market is largely determined by the private sector first and the public sector or government second.
The government does not have a lot of say on how many jobs are lost or gained in an economy every month as the private sector determines that.
Do citizens want strong economies?
Not every average citizen is an economist or even thinks about it from the public sector point of view. However, every citizen worries about the money in their wallets and home budgets, regardless of their state or lot in life.
As such, yes, every citizen wants their country to be doing well, even if they don’t agree with a policy that has resulted in a higher tax bill or work from home policy (examples of factors that influence economic growth).
The economy is something every leader mentions when they are campaigning for their role. Every good leader knows every citizen is thinking of this.
They may not use the word economy, but they will use words like infrastructure, taxes, health care, innovation, and even immigration.
There is a saying that there is a price for everything in this world today. Every time money changes hands, the economy is stimulated.
Even if a citizen isn’t thinking of their nation’s economic growth when they are grocery shopping or buying health care, influencing the economy is precisely what they are doing.
Are there situations where citizens don’t want strong economies?
This is a rare situation. There may be the average citizen who doesn’t care about making money, or having it to spend, but most people do want their country doing well.
However, there is a difference between wanting a strong economy as a voter or citizen and pursuing that. Not every nation is capable of producing or developing at the rate of developed countries such as the United States, Canada, and the United Kingdom.
The country of Syria for example would greatly benefit from increases in innovation and infrastructure. This is a nation where a loaf of bread could cost $10 and a minimum wage worker might make the USD equivalent of three thousand dollars a year.
This is not a country that does not want to do better, but it is one that simply can’t due to other factors such as war and extraneous social influences.
Does immigration play a role in economic growth?
There will always be two sides to this argument, with both arguments being fueled by politics. Immigration is an important component of every economy, despite its initial expense.
At the same time, it depends on in which country the immigration occurs.
Many leaders of developed lands will view immigration as a pool of skilled talent in a workforce with added jobs. However, a place such as Syria would view immigration as a problem.
Economic growth rates in developed countries that are studied in conjunction with the rates of visa distribution would be revelatory in this regard.
In other words, if growth was measured and reported alongside immigration rates, the public against immigration might be startled. Every new immigrant is an opportunity for another taxpayer, despite the initial costs of bringing them into the country.
Do you understand economic growth better?
Economic growth in any nation is a function of supply and demand, and supply and demand are not just about products. The supply of labor, the demand for labor, and the supply and demand of a successful private sector all play roles in a successful economy.
A country can contribute to its own economic growth through more tax policy, greater infrastructure plans and development, and a satisfied labor market. Understanding this will help you to understand how economic growth functions in any country and society.
Do you understand economic growth better? What factors of economic growth bother you or interest you the most?