Economic growth

Definition

Economic growth refers to the increase in the production of goods and services in an economy over a period of time, usually measured as the percentage increase in real gross domestic product (GDP). This growth reflects improvements in productivity, technological advancements, and an increase in factors such as labor and capital. Economic growth is essential for enhancing living standards, reducing poverty, and providing governments with the resources needed to invest in public goods and services.

5 Must Know Facts For Your Next Test

1. Economic growth can result from factors such as technological innovations, capital accumulation, and improvements in labor skills.
2. Increased economic growth often leads to higher employment rates, as businesses expand and require more workers to meet demand.
3. Countries that attract foreign direct investment typically experience faster economic growth due to the influx of capital, technology transfer, and managerial expertise.
4. Sustained economic growth is vital for reducing income inequality and improving social welfare by creating more job opportunities and increasing government revenues.
5. Economic growth is often accompanied by environmental challenges, prompting discussions about sustainable development to balance growth with ecological concerns.

Review Questions

• How do international factor movements influence economic growth in developing countries?
  • International factor movements, such as labor migration and capital flows, can significantly enhance economic growth in developing countries. When skilled workers migrate to these nations, they bring valuable expertise that can improve productivity. Additionally, capital inflows through foreign direct investment provide funding for new businesses and technologies, leading to increased production capacity. This combination helps create jobs, raise income levels, and ultimately stimulates overall economic growth.
• Analyze the relationship between foreign direct investment (FDI) and economic growth. What mechanisms facilitate this connection?
  • Foreign direct investment (FDI) plays a critical role in fostering economic growth by introducing new capital into the host country. Mechanisms facilitating this connection include the transfer of advanced technology and management practices from foreign firms to local enterprises. This enhances productivity and efficiency in various sectors. Moreover, FDI often creates jobs, boosts local incomes, and leads to improved infrastructure development, further driving economic expansion and contributing to sustainable growth.
• Evaluate the long-term impacts of sustained economic growth on income inequality and environmental sustainability. What trade-offs might arise?
  • Sustained economic growth can have mixed long-term impacts on income inequality and environmental sustainability. On one hand, it can reduce income inequality by creating job opportunities and increasing overall wealth; however, it can also exacerbate disparities if the benefits of growth are not evenly distributed. Additionally, rapid economic expansion can lead to environmental degradation if natural resources are exploited without regard for ecological impacts. Policymakers face the challenge of balancing these trade-offs by promoting inclusive growth while ensuring environmental protections are integrated into economic strategies.

Related terms

Gross Domestic Product (GDP): The total monetary value of all finished goods and services produced within a country's borders in a specific time period.

Foreign Direct Investment (FDI): An investment made by a company or individual in one country in business interests in another country, typically by establishing business operations or acquiring assets.

Productivity: A measure of how efficiently goods and services are produced, usually expressed as the ratio of output to inputs used in production.