Economic growth is measured by an increase in gross domestic product(GDP), which is defined as the combined value of all goods and services produced within a country in a year. Many forces contribute to economic growth. However, there is no single factor that consistently spurs the perfect or ideal amount of growth needed for an economy. Unfortunately, recessions are a fact of life and can be caused by exogenous factors such as geopolitical and geo-financial events.
Politicians, world leaders, and economists have widely debated the ideal growth rate and how to achieve it. It's important to study how an economy grows, meaning what or who are the participants that make an economy move forward.
In the United States, economic growth is driven oftentimes by consumer spending and business investment. If consumers are buying homes, for example, home builders, contractors, and construction workers will experience economic growth. Businesses also drive the economy when they hire workers, raise wages, and invest in growing their business. A company that buys a new manufacturing plant or invests in new technologies creates jobs, spending, which leads to growth in the economy.
Other factors help promote consumer and business spending and prosperity. Banks, for example, lend money to companies and consumers. As businesses have access to credit, they might finance a new production facility, buy a new fleet of trucks, or start a new product line or service. The spending and business investments, in turn, have positive effects on the companies involved. However, the growth also extends to those doing business with the companies, including in the above example, the bank employees and the truck manufacturer.
In this article are a few of the measures that are often employed to increase and promote economic growth.
Key Takeaways
- Economic growth is driven oftentimes by consumer spending and business investment.
- Tax cuts and rebates are used to return money to consumers and boost spending.
- Deregulation relaxes the rules imposed on businesses and have been credited with creating growth but can lead to excessive risk-taking.
- Infrastructure spending is designed to create construction jobs and increase productivity by enabling businesses to operate more efficiently.
Tax Cuts and Tax Rebates
Tax cuts and tax rebates are designed to put more money back into the pockets of consumers. Ideally, these consumers spend a portion of that money at various businesses, which increases the businesses' revenues, cash flows, and profits. Having more cash means companies have the resources to procure capital, improve technology, grow, and expand. All of these actions increase productivity, which grows the economy. Tax cuts and rebates, proponents argue, allow consumers to stimulate the economy themselves by imbuing it with more money.
In 2017, the Trump administration proposed, and Congress passed the Tax Cuts and Jobs Act. The legislation lowered corporate taxes to 20%— the highest corporate income tax rate was 35% before the bill. Various personal income tax brackets were lowered as well. The bill cost $1.5 trillion and is designed to increase economic growth for the next ten years.
As with any stimulus used to spur economic growth, it's often difficult to pinpoint how much growth was created by the stimulus and how much was generated by other factors and market forces.
Stimulating the Economy With Deregulation
Deregulation is the relaxing of rules and regulations imposed on an industry or business. It became a centerpiece of economics in the United States under the Reagan administration in the 1980s, when the federal government deregulated several industries, most notably financial institutions. Many economists credit Reagan's deregulation with the robust economic growth that characterized the U.S. during most of the 1980s and 1990s. Proponents of deregulation argue tight regulations constrain businesses and prevent them from growing and operating to their full capabilities. This, in turn, slows production and hiring, which inhibits GDP growth. However, economists who favor regulations blame deregulation and a lack of government oversight for the numerous economic bubbles that expanded and subsequently burst during the 1990s and early 2000s.
Many economists cite that there was a lack of regulatory oversight leading up to the financial crisis of 2008. Subprime mortgages, which are high-risk mortgages to borrowers with less-than-perfect credit, began to default in 2007. The mortgage industry collapsed, leading to a recession and subsequent bailouts of several banks by the U.S. government. New regulations were implemented in the years to follow that imposed increased capital requirements for banks, meaning they need more cash on hand to cover potential losses from bad loans.
Using Infrastructure to Spur Economic Growth
Infrastructure spending occurs when a local, state, or federal government spends money to build or repair the physical structures and facilities needed for commerce and society as a whole to thrive. Infrastructure includes roads, bridges, ports, and sewer systems. Economists who favor infrastructure spending as an economic catalyst argue that having top-notch infrastructure increases productivity by enabling businesses to operate as efficiently as possible. For example, when roads and bridges are abundant and in working order, trucks spend less time sitting in traffic,and they don't have to take circuitous routes to traverse waterways.
Additionally, infrastructure spending creates jobs as workers must be hired to complete the green-lighted projects. It is also capable of spawning new economic growth. For example, the construction of a new highway might lead to other investments such as gas stations and retail stores opening to cater to motorists.
During the Great Recession, the Obama administration, along with Congress proposed and passed The American Recovery and Reinvestment Act of 2009. The stimulus package was designed to spur economic growth in the economy since business and private investment was waning. The Obama stimulus as it's commonly referred to included federal government spending exceeding $80 billion for highways, bridges, and roads. The stimulus was designed to help create construction jobs that were hit hard due to the impact from mortgage crisis on residential and commercial construction.
FAQs
Economic growth is driven oftentimes by consumer spending and business investment. Tax cuts and rebates are used to return money to consumers and boost spending. Deregulation relaxes the rules imposed on businesses and have been credited with creating growth but can lead to excessive risk-taking.
What are the ways to achieve economic growth? ›
Economic growth is driven oftentimes by consumer spending and business investment. Tax cuts and rebates are used to return money to consumers and boost spending. Deregulation relaxes the rules imposed on businesses and have been credited with creating growth but can lead to excessive risk-taking.
What 5 things are needed for economic growth? ›
Top Five Factors That Spur Economic Growth
- Natural Resources. Natural resources are the number one factor that spurs economic growth. ...
- Deregulation. People were meant to trade with each other. ...
- Technology. Technology has always played a pivotal role in economic growth. ...
- Human Resources. ...
- Infrastructure.
There are three main factors that drive economic growth:
- Accumulation of capital stock.
- Increases in labor inputs, such as workers or hours worked.
- Technological advancement.
Economists define four factors of production: land, labor, capital and entrepreneurship. These can be considered the building blocks of an economy. How these factors are combined determines the success or failure of the outcome.
What does it mean to achieve economic growth? ›
Economic growth describes how much an entity, such as a country, is increasing and improving the goods and services it produces.
What three things create economic growth? ›
Three factors can create economic growth: more capital, more labor, and better use of existing capital or labor. The growth that results from increases in capital and labor represents growth due to increases in inputs.
What are the 7 factors that lead economic success? ›
What are the Economic Factors?
- #1- Interest Rate.
- #2 – Exchange Rate.
- #3 -Tax Rate.
- #4 – Inflation.
- #5 – Labor.
- #6 – Demand / Supply.
- #7 – Wages.
- #8 – Law and Policies.
“CEDA has identified 10 key areas where action needs to be taken which are: innovation; competition policy; education; workforce participation; infrastructure; fiscal resilience; tax reform; federalism; workplace relations; and climate change.
What are three economic growth examples? ›
Increases in capital goods, labor force, technology, and human capital can all contribute to economic growth.
Books, which were previously only available to a tiny elite, became available to more and more people. This is one example of how growth is possible and what economic growth is: an increase in the production of goods and services that people produce for each other.
What are the three goals of a successful economy? ›
To maintain a strong economy, the federal government seeks to accomplish three policy goals: stable prices, full employment, and economic growth. In addition to these three policy goals, the federal government has other objectives to maintain sound economic policy.
What are 4 examples of economic factors? ›
Economic factors include economic growth, percentage of unemployment, inflation, interest and exchange rates, and commodity (oil, steel, gold, etc) prices.
What are the goals to achieve in economic? ›
National economic goals include: efficiency, equity, economic freedom, full employment, economic growth, security, and stability. Economic goals are not always mutually compatible; the cost of addressing any particular goal or set of goals is having fewer resources to commit to the remaining goals.
Why do we need to achieve economic growth? ›
The benefits of economic growth include. Higher average incomes. Economic growth enables consumers to consume more goods and services and enjoy better standards of living. Economic growth during the Twentieth Century was a major factor in reducing absolute levels of poverty and enabling a rise in life expectancy.
What are the different types of economic growth? ›
Generally, there are 3 different types of growth that take place in an economy. There is the trend growth, potential growth, and actual growth.
What causes the most economic growth? ›
Economic growth is caused by two main factors: An increase in aggregate demand (AD) An increase in aggregate supply (productive capacity)
What is the biggest cause of economic growth? ›
Causes of economic growth
At the core of economic growth is the increase in productivity, which is the efficiency with which inputs (like labor and capital) are used to produce goods and services.
What defines a successful economy? ›
two main measures of economic success are currently GDP at the national level and profit at the organisational level. GDP is a value-added measure that is broader than profit.
How does the economy succeed? ›
So, an economy works by creating a network of markets composed of buyers and sellers. These economic markets allocate scarce resources among the players within that market. When we think of a country's economy, we're usually thinking in terms of macroeconomics.
The three most common ways to measure real GDP are: Quarterly growth at an annual rate. The four-quarter or "year-over-year" growth rate. The annual average growth rate.
What are the 5 goals of every economy? ›
In general, the primary economic goals include full employment, economic growth, economic stability, equality, and enhanced efficiency.
What is the best economic growth? ›
The ideal GDP growth rate is between 2% and 3%. The GDP growth rate measures how healthy the economy is. When the number is positive, the economy is growing. When the number is negative, the economy is contracting.
What are 5 examples of economy? ›
One can broadly classify five distinct examples of economic activities. These activities are producing, supplying, buying, selling, and the consumption of goods and services.
What are some examples of growth? ›
An example of biological growth is a plant seed developing into a fully mature tree. At a cellular level, cell growth means an increase in size or an increase in number. In medical science, growth may be associated with pathology (disease).
What is an example of sustainable economic growth? ›
Recycling and reducing pollution is a common economic and environmental stability practice that can help increase the value of materials. For example, a company producing aluminum cans can sustain operations by recycling used cans and creating molten aluminum for recasting, instead of mining for aluminum ore.
How can we promote sustainable economic growth? ›
Four steps towards a more sustainable global economy
- Diversify economies. Development strategies are not implemented overnight. ...
- Stem the rise of inequalities. ...
- Make finance sustainable. ...
- Improve institutions.
Economic activities:
Transportation,Mining,Manufacturing,Production,Banking,Distribution,Consumption,Farming,Cultivation,Livestock keeping.
What are the 6 economic goals and how are they achieved? ›
The U.S. six economic objectives comprise economic freedom, economic growth, efficiency, and full employment, security, and stability. The most important economic goal is economic stability. This is because economic stability enables other macroeconomic objectives to be achieved.
How do you achieve economic stability? ›
How to achieve economic stability? A government can achieve macroeconomic stability by focusing on economic indicators like GDP, inflation, interest rates, and other economic variables. Constant monitoring, controlling, and responsiveness to these indicators will help achieve stability.
Books, which were previously only available to a tiny elite, became available to more and more people. This is one example of how growth is possible and what economic growth is: an increase in the production of goods and services that people produce for each other.
What are 3 goals of a strong economy? ›
All economies share three goals: growth, high employment, and price stability. Growth. An economy provides people with goods and services, and economists measure its performance by studying the gross domestic product (GDP)—the market value of all goods and services produced by the economy in a given year.
What are the 7 economic goals of a market economy? ›
These seven goals are economic freedom, economic equity, economic security, economic growth, economic efficiency, price stability, and full employment.
What are 3 examples of economic stability? ›
Economic stability means that people have the resources essential to a healthy life. Factors affecting economic stability include affordable housing; employment that provides a living wage; things that support employment, like worker protections, paid sick leave, and child care; and access to reliable transportation.
How does the government promote economic growth? ›
In the short term, governments may focus on macroeconomic stabilization—for example, expanding spending or cutting taxes to stimulate an ailing economy, or slashing spending or raising taxes to combat rising inflation or to help reduce external vulnerabilities.
What makes a successful economy? ›
Improved standards of living are made possible when labor is more productive. Productivity is driven by specialization, technological innovation, and working capital. The only sustainable way for an economy to grow is through increased productivity.
What is the most important in economic growth? ›
Increases in capital goods, labor force, technology, and human capital can all contribute to economic growth. Economic growth is commonly measured in terms of the increase in aggregated market value of additional goods and services produced, using estimates such as GDP.
