Economic growth

Economic growth

Economic growth is the quantitative increase in national income produced in an economy. It is the increase in the market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase of real gross domestic product, or real GDP.

Economic growth is concerned with increase in size of national income or growth of national product (GNP). Therefore economic growth is concerned with increase in level of output produced in an economy without considering social and political aspects of the economy.

Determinants of economic growth

The level of economic growth may be determined by various factors. These are:

1. Availability of natural resources (natural endowment) Natural resources may include all natural endowment such as soil, forests, minerals resources, climatic situation and so on. Therefore if a country is endowed with these resources and they are well used in production, the size of output will increase (economic growth) and if not available, it will cause low level of economic growth.

2. Human factor / availability of quantity and quality of labour force A country which has a strong number of labour force and high quality (skilled labour), these labour may engage in production activities and make effective utilization of natural resources which lead to high economic growth, while unavailability of skilled and unskilled labour causes low rate of economic growth.

3. Technology progress / state of technology Improvement in state of technology may cause people to use modern tools in production process which cause large production and economic growth while low level of technology also may lead to lower economic growth.

4. Availability of capital and capital accumulation A country with high level of capital and being able to accumulate capital will be able to produce more goods and services while a country with less capital will produce less and lead to low level of economic growth.

5. Political situation This includes political stability and instability. A country with political and social stability creates conducive environment for investment and production which leads to high rate of economic growth, while political and social instability discourages investment and production which causes low rate of economic growth.

6. Investment and economic policies of government Conducive economic and investment policies such as low tax, increase in subsidies, less documentation and procedure in investment may encourage investment and cause high rate of economic growth and poor policies may hinder economic growth. Economic policies also includes improved economic infrastructure, economic stabilization policies etc.

7. Availability of entrepreneur and entrepreneurial ability A country with large number of entrepreneurs and many people with entrepreneurial ability will be able to establish and run successful business units that will produce more goods and services and high rate of economic growth while less number of entrepreneurs reduce investment and economic growth in an economy.

Effects of economic growth in an economy

Economic growth in a country like Tanzania may have both positive and negative effects.

Positive effects of economic growth

1. Increase in per capita income Economic growth causes increase in output produced and national income (GNP). This may cause rise in per capita income which may be associated with improved living standards.

2. High level of employment Increase in production of goods and services causes increase in demand for factors of production which leads to the increase in employment level i.e. employment of labour.

3. Rapid industrialization Economic growth facilitates increase in demand for industrial goods and increase in production will cause increase in industrial activities in an economy.

4. Improvement in economic infrastructure Population and government may enjoy improved infrastructure due to their economic growth because government and private sector may improve road, railways, airways and communication system when economic growth occurs.

5. Diversification of an economy When there is economic growth, a country may enjoy diversified economy because the economy may grow well if there is diversified economy i.e. economy composed of many sectors which are almost equally developed.

6. Increase in utilization of resources High economic growth means resources are well utilized in production, therefore these may give effects of effective or high utilization of resources.

7. Growth of towns / urbanization Due to economic growth, economic activities such as industrial and trading activities may cause growth of towns or urbanization in an economy.

Negative effects of economic growth

Apart from positive effects, economic growth may have negative effects in an economy. These are:

1. Environmental degradation Due to rapid economic growth and industrialization, environmental degradation such as pollution, deforestation, soil erosion may occur in a country.

2. Over exploitation and wasteful utilization of resources Economic growth causes excessive demand for economic resources like soil, minerals, which then cause over exploitation and exhaustion of such resources.

3. Income inequality and unequal development Economic growth does not consider how income is distributed among people in a nation and unequal distribution of industries and development in a country.

4. Rural-urban migration This may occur due to increase in economic activities in urban areas while rural area lags behind. This will attract many people to leave rural to urban so as to get employment and enjoy urban amenities, this reduces level of economic activities in rural areas.