Economic Growth Theories - Sources of Growth - Where does it come from?
Growth is not an automatic birthright for an economy. For an economy to grow, it has to create the right conditions for growth. Growth depends to a significant extent on the resources a country has. The better the quantity and the quality of the resources the more potential it has to grow.
The sources of growth therefore include:
- Natural resources - if an economy has a plentiful supply of natural resources it may help it to expand. However, natural resources on their own are not enough. There also have to be the skilled people to exploit the opportunities.
- Capital - more capital generally means more production, and more production means more growth. To get capital, countries have to invest and so the level of investment may be a big determinant of future growth. The quality of the capital is important as well. It's no good investing in out of date equipment!
- Rate of savings - to have more tomorrow you often have to have less today (jam tomorrow!). This is true with savings as well. To provide funds for investment there needs to be a good level of savings. This should in turn mean more growth in the future.
- Technological progress - this is perhaps the most widely accepted (and easiest to understand) source of economic growth. This is because technology makes it possible to produce more from the same quantity of resources (or factors of production
). This boosts the potential level of out put of the economy. The pace of technological change will depend on:
- the scientific skills of the country
- the quality of education
- the amount of GDP devoted to research and development