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Factors Affecting Economic Development and Growth

Defining a Factor of Production

❶Major Factors Influencing Economic Growth.

Creating Economic Growth

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It will be seen from the table, the growth in the quantity of labour accounted for 32 per cent of growth in GDP of the USA over this period. The other group consists of various variables determining growth in labour productivity has been divided into five factors.

It is noteworthy that education per worker contributed 14 per cent to growth in output during this period technological change contributed 28 per cent to the growth in output. Thus, growth in education per worker and technological change together accounted for 42 per cent of growth in the output in the USA over this period whereas capital formation contributed 19 per cent to the growth rate. This shows the great importance of education and technological change as determinants of economic growth.

Another approach to measure the contribution of education is based upon the analysis of the relationship between expenditure on education and income. Using this approach Schultz studied the relationship between expenditure on education and individual income and also the relationship between expenditure on education and physical capital formation for the United States during the period to It may, however, be noted that these estimates of Schultz only indirectly reflect the contribution of education to economic growth.

In our above analysis we have explained that education is regarded as investment and like investment in physical capital, it raises productivity of labour and thus contributes to growth of national income. Some economists have argued that education is of crucial importance not only because education raises the productivity and therefore earnings of individual workers, but it creates positive externalities, that is, beneficial external effects.

A positive externality occurs when the activity of a person provides benefits to others. For example, an educated person might generate new ideas which may lead to the improvement in methods of producing goods.

These ideas are therefore external benefits of education. One problem facing the developing countries, especially India is of brain drain, that is, migration of a large number of highly educated persons such as those trained by IIT, IIM and medical colleges to the developed countries such as USA to make higher earnings there. If education has positive external effects, then this brain drain will deprive the Indian economy of the beneficial effects which these educated people would have created here.

Another important factor in economic growth is progress in technology, Use of advanced techniques in production or progress in technology brings about a significant increase in per capita output. Technological advance refers to the discovery of new and better ways of doing things or an improvement in the old ways.

As a result of technological advance it becomes possible to produce more output with same resources or the same amount of product with less resource.

But the question arises as to how the technological progress takes place. The word invention is used for the new scientific discoveries, whereas the innovations are said to take place only when the new scientific discoveries are used for actual production processes or commercial purposes.

Some inventions may not be economically profitable to be used for actual production. It is quite well known that improvements in technology greatly increase the effectiveness with which natural resources are used. It may also be noted that some technological improvements have resulted in the increased effectiveness with which capital goods are used.

But, as stated above, technological change more generally results in higher productivity of resources. Technological change raises the productivity of workers through the provision of better machines, better methods and superior skills.

By bringing about increase in productivity of resources the progress in technology makes it possible to produce more output with the same resources or the same amount of output with less resource.

Technical progress manifests itself in the change in production function. The technological change may operate upon the production function through improvements of various sorts such as superior equipment, an improved material, and superior organisational efficiency. Also, the technological progress may express itself in making available new products.

It is now widely accepted that technological change raises productivity and that a continuous technological change will enable the economy to escape from being driven to the stationary state or economic stagnation. Classical economists like Ricardo and J. Mill expressed fear that the increase in the stock of capital will sooner or later, because of the operation of diminishing returns, land the economy into stationary state beyond which economic growth will come to an end.

It may be noted that Adam Smith viewed technological progress as a rise in productivity of workers as a result of increase in division of labour and specialisation. The rise in productivity leads to the growth in national income. But it was J. Schumpeter who laid great stress on the role of technological innovations in bringing about economic growth.

He laid stress on the introduction of technical innovations in bringing about economic progress. It is the entrepreneur who carries out the innovations and organises the production structure more efficiently.

As, according to Schumpeter, innovations occur in spurts rather than in a smooth flow, economic progress is not a smooth and an uninterrupted process. Rostow proposed five stages in the development of an economy. It may be noted that the economic transformation of the society from one stage to another involves, along with other things, a change in the level and character of technology. In the present age of greater specialisation it is the technology factor that underlies all major aspects of the modern productive apparatus such as decision making, production programming, skill requirements and market strategy.

Productivity of worker depends upon the quantity and quality of capital tools with which the labourers work. The technological options open to an economy determine the input-mix of production. A commodity can be produced by various technologies. The quantity and quality of capital, skills and other factors required for production is directly dependent on the efficiency of the technique of production being used.

Also, the managerial and organisational expertise has to be in tune with the technological requirements of production. This is the age of technology. The developing countries are obsessed by the desire to make rapid progress in technology so as to catch up with the present-day developed countries.

Indeed, the newly emerging nations have come to regard technology as a bastion of national autonomy and as a status symbol in the international community. The process of technological progress is inseparably linked with the process of capital formation.

In fact, both go hand in hand. Technological progress is virtually impossible without capital formation. It is because the introduction of superior or more efficient techniques require building up of new capital equipment which incorporates new technology. In other words, new and superior technology can contribute to national product and its growth if it is first embodied in the new capital equipment. The new capital investment has, therefore, been called the vehicle for the steady introduction of new technology into the economy.

As is well known, it is the inventions and innovations in cotton textile industry that led to the industrial revolution in England. It is that the technology of the advanced countries is not in accordance with the factor endowments of these developing countries, since they have abundance of capital while the developing countries have surplus labour.

As a result of the use of the capital-intensive technology, enough employment opportunities have not been created by the large-scale industries using imported technology.

As a result, unemployment in developing countries like India has been increasing despite the progress in industrialisation of the economy. In view of this not so happy experience in regard to the creation of employment opportunities by industrial growth, an eminent English economist, Prof.

By Intermediate or appropriate technology is meant the technology which is labour-intensive and yet highly productive so that with its use enough employment opportunities are created along with more production. The growth of population is another factor which determines the rate of economic growth. Improvements in technology have a high impact on economic growth. As the scientific community makes more discoveries, managers find ways to apply these innovations as more sophisticated production techniques.

The application of better technology means the same amount of labor will be more productive, and economic growth will advance at a lower cost. Countries that recognize the importance of the four factors that affect economic growth will have higher growth rates and improved standards of living for their people. Technological innovation and more education for workers will improve economic output which lead to a better living environment for everyone. Increases in labor productivity are much easier to achieve when investments are made on better equipment that require less physical work from the labor force.

James has been a management consultant to more than 1, small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management challenges. James has been writing business and finance related topics for blogs and e-commerce websites since Skip to main content.

Human Resources The skills, education and training of the labor force have a direct effect on the growth of an economy. Physical Capital Improvements and increased investment in physical capital - such as roadways, machinery and factories - will reduce the cost and increase the efficiency of economic output.

The quality of human resource is dependent on its skills, creative abilities, training, and education. If the human resource of a country is well skilled and trained then the output would also be of high quality.

On the other hand, a shortage of skilled labor hampers the growth of an economy, whereas surplus of labor is of lesser significance to economic growth. Therefore, the human resources of a country should be adequate in number with required skills and abilities, so that economic growth can be achieved.

Affect the economic growth of a country to a large extent. Natural resources involve resources that are produced by nature either on the land or beneath the land. The resources on land include plants, water resources and landscape. The resources beneath the land or underground resources include oil, natural gas, metals, non-metals, and minerals. The natural resources of a country depend on the climatic and environmental conditions.

Countries having plenty of natural resources enjoy good growth than countries with small amount of natural resources. The efficient utilization or exploitation of natural resources depends on the skills and abilities of human resource, technology used and availability of funds.

A country having skilled and educated workforce with rich natural resources takes the economy on the growth path. The best examples of such economies are developed countries, such as United States, United Kingdom, Germany, and France.

However, there are countries that have few natural resources, but high per capita income, such as Saudi Arabia, therefore, their economic growth is very high. Similarly, Japan has a small geographical area and few natural resources, but achieves high growth rate due to its efficient human resource and advanced technology. Involves land, building, machinery, power, transportation, and medium of communication. Producing and acquiring all these manmade products is termed as capital formation.

Consequently, the productivity of labor increases, which ultimately results in the increase in output and growth of the economy.


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The economic growth of a country may get hampered due to a number of factors, such as trade deficit and alterations in expenditures by governmental bodies. Generally, the economic growth of a country is adversely affected when there is a sharp rise in the prices of goods and services.

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Factors that Determine Economic Growth and Development of a Country! The process of economic growth is a highly complex phenomenon and is influenced by numerous and varied factors such as economic, political, social and cultural factors.

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Economic growth is one of the most important indicators of a healthy economy. One of the biggest impacts of long-term growth of a country is that it has a positive impact on national income and the level of employment, which increases the standard of living. Major Factors Influencing Economic Growth by Annie Sisk - Updated June 25, Economic growth is defined as an increase in the amount of goods or services an economy can produce, as measured over a certain period of time.

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Traditionally, the factors used to determine economic growth are capital - both human and physical, productivity as mentioned by Ms. Fanni Likacsy, Research & Development, Institutional factors and Policies. Four Factors of Economic Growth 1. Ansley BennettLanier Middle School 4 Factors of Economic Growth• There are four factors that determine a country’s Gross Domestic Product for the year: – Natural Resources – Human Capital – Capital Goods – Entrepreneurship.