Factors That Affect Economic Growth

The follow six causes of economic growth are key components in an economy. Improving or increasing their quantity can lead to growth in the economy......


1. Natural Resources
The discovery of more natural resources like oil, or mineral deposits may boost economic growth as this shifts or increases the country’s Production Possibility Curve. Other resources include land, water, forests and natural gas.

Realistically, it is difficult, if not impossible, to increase the number of natural resources in a country. Countries must take care to balance the supply and demand of scarce natural resources to avoid depleting them. Improved land management may improve the quality of land and contribute to economic growth.

For example, Saudi Arabia’s economy has historically been dependent on its oil deposits.

2. Physical Capital or Infrastructure
Increased investment in physical capital such as factories, machinery, and roads will lower the cost of economic activity. Better factories and machinery are more productive than physical labor. This higher productivity can increase output. For example, having a robust highway system can reduce inefficiencies in moving raw materials or goods across the country which can increase its GDP.


3. Population or Labor
A growing population means there is an increase in the availability of workers or employees, which means a higher workforce. One downside of having a large population is that it could lead to high unemployment.

4. Human Capital
An increase in investment in human capital can improve the quality of the labor force. This would result in an improvement of skills, abilities, and training. A skilled labor force has a significant effect on growth since skilled workers are more productive. For example, investing in STEM students or subsidizing coding academies would increase the availability of workers for higher-skilled jobs that pay more than investing in blue collar jobs.

5. Technology
Another influential factor is the improvement of technology. Technology could increase productivity with the same levels of labor, thus accelerating growth and development. This means factories can be more productive at lower costs. Technology is most likely to lead to sustained long-run growth.

6. Law
An institutional framework which regulates economic activity such as rules and laws. There is no specific set of institutions that promote growth.