12.1 What Is Economic Growth?

Economic growth of a nation refers to an increase in the value of goods and services produced by all sectors of an economy. The growth relates to an increase in one or all components of the GDP: consumption, investment, government spending and net exports. Economic growth is measured by quantitative factors such as an increase in the nation’s per-capita income (Ostwald, n.d.). Countries differ dramatically in their economic growth, however when comparing one country to another, the GDP per capita can be misleading because it does not consider the cost of living. To account for the cost of living, the GDP must be adjusted for purchasing power, known as purchasing power parity (PPP) adjustment (see Chapter 11).

The main factors that influence the economic growth of a nation include geography and natural resources, education, and demographics.

Geography and Natural Resources

Geographic location influences the economic policies of a country. Countries with access to seas and waterways are more likely to engage in trade, which promotes economic growth. Landlocked countries, on the other hand, are unlikely to develop economically as fast. The study done by Gallup, Sachs, and Mellinger (1998) confirms that landlocked countries have slower growth rates than coastal countries. The study also shows that tropical regions—those closer to the equator—grow slowly compared to temperate regions—such as North America and Europe. The reason is that the tropic regions have poorer soil and higher rates of diseases (Gallup et al. 1998).

Natural resources such as land, the quality of soil, minerals, water sources, good climate, etc., are the base of our living and the entire economic activity. For an economy to grow, it has to produce goods and services for which the use of natural resources is unavoidable. If countries do not have access to the necessary natural resources within their geographic borders, they have to acquire them from other regions. Economic growth is not possible without access to natural resources; however, in today’s world, many developed countries do not own resources and are dependent on other countries.

On the other hand, resource-rich countries have a slower growth rate than those with no resources. For example, Russia holds $75 trillion US dollars on natural resources, while the United States has natural resources of over $45 trillion US dollars (Jaganmohan, 2024). While the growth rate based on GDP for the United States was $25 trillion US dollars as of 2022, Russia’s GDP for the same period was $2.27 trillion US dollars (O’Neill, 2024, May 3). At the same time, countries such as Singapore that is not rich in natural resources but invested 20% of its national budget in the education sector (Hirschmann, 2024), has strong regulatory institutions, political stability and favourable geographic location, with $66,176 GDP per capita, 2021, ranks the highest in the region (EDB, n.d.), while Sub-Saharan Africa which owns over 30% of world’s natural resources (NRGI, n.d.) has a $4,455 GDP per capita for 2021 (O’Neill, 2024, May 16). These statistics show that resource-rich countries need strong regulatory institutions and political stability to develop, administer and control their natural resources. This can be achieved by investing in the labour force’s education and training.

Education

Education is considered another main force in economic growth. Countries investing in education have experienced greater economic progress. According to Hanushek and Wößmann (2010), education helps with economic growth in three ways: labour productivity, innovation capacity, and fast learning abilities.

Labour Productivity

An educated labour force can be productive, and productivity translates into economic growth. An analysis published by the Economic Policy Institute in the US shows that states with the most educated workforce have experienced higher productivity and growth (Berger, 2013). The analysis also shows the link between productivity and higher wages. Median wages in those states that have a more educated workforce are much higher than those in states with a less educated workforce.

Innovation Capacity

Education can cultivate innovation and technological advancement, which in turn promotes productivity and growth. Innovative ideas are transferable and can be used by others as well. Therefore, the value derived from education extends beyond the benefit granted to the immediate recipient and can create value for an entire economy (Biasi, 2021).

Fast Learning Abilities

Education improves brain function and promotes cognitive performance, which helps with faster processing of new information (Guerra-Carrillo et al., 2017). A labour force with fast learning abilities is more efficient, and efficiency contributes to economic growth.

Demographics

The growth rate and dynamics of the population are important determinants of a country’s long-term economic growth. The world population has grown from 3 billion in 1960 to 6 billion around 2000 and is expected to reach 9 billion by 2037. However, there is a big shift when it comes to population distribution by region. Less developed countries are home to 84% of the world’s population today compared to 68% in 1950 (Bloom, 2020).

Growing Population

A growing population contributes to economic growth in two ways: an increase in the labour force supply and the creation of demand for goods and services. A large labour force produces a large amount of goods and services, which are then absorbed by this wide market. Employment and income keep on rising, and economic growth continues (Investopedia Team, 2023). It is worth mentioning that population growth is more desirable in low-populated countries with advanced economies, such as Canada, where the growth helps with worker shortages and boosts economic growth (Gravelle, 2023). The outcome is not the same in overpopulated countries such as India, where a further increase in population will only put more strain on the economy (Bloom, 2020).

Population Dynamics

Population dynamics refers to population variation based on birth and death rates, immigration, and the aging population. Population dynamics are influenced by age structure, which impacts the participation rate in the labour force of a country (Crossman 2019). The mortality and fertility rates directly affect the working age population. The Organization of the United Nations divides age structure into three phases. In phase one, the fertility rate is rising, but the mortality rate falls, and more children survive through their childhood, leading to an increase in the younger age population. In the second phase, both fertility and mortality rates go down, and the number of young children also goes down in proportion to the adult and working-age population. The decrease in dependent young children and the increase in the working-age population leads to productivity and growth in income, which results in a demographic dividend. The third phase in the age structure is called aging population. This is when the low fertility level stays unchanged over many decades, the number of young adults declines, while the number of people growing older rises (DESA, 2017). The aging population requires more healthcare services, pensions, and other government support, which stresses government finances (Hayes, 2023).

References

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Bloom, D.E. (2020, March 8). Population 2020. Finance & Development. https://www.imf.org/en/Publications/fandd/issues/2020/03/changing-demographics-and-economic-growth-bloom

Crossman, A. (2019, September 28). Age structure and age pyramids. Thought Co. https://www.thoughtco.com/age-structure-definition-3026043

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Guerra-Carrillo, B., Katovich, K., & Bunge, S. A. (2017). Does higher education hone cognitive functioning and learning efficacy? Findings from a large and diverse sample. PloS One, 12(8), e0182276. https://doi.org/10.1371/journal.pone.0182276

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O’Neill, A. (2024, May 16). Gross domestic product (GDP) per capita in Sub-Saharan Africa 2024. Statista. https://www.statista.com/statistics/805567/gross-domestic-product-gdp-per-capita-in-sub-saharan-africa/

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