Examine the factors which explain the differences between economic growth rates in countries

Harjevan Hare

Examine the factors which explain the differences between economic growth rates in countries

Economic growth is the long term increase in productive capacity as shown by an outward shift on a PPF curve. The PPF shows the maximum potential output of the economy. Productive capacity is an economies ability to produce goods and services, so if an economy grows, it can produce more goods and services for the population of the economy to use.

Differences in Economic growth in countries result due to many factors, such as land and its resources. The amount of land a country possesses, and all the natural resources it finds on the land can affect the amount of output. For example, Saudi Arabia has experienced very high growth rates due to the richly endowed lands which contain much oil. In this developing economy, the oil exploitation was vital for its growth. Some 3rd world countries are so poor, and lack such growth as Saudi Arabia, because they have insufficient land, or insufficient resources to produce goods and have a higher output, and therefore have a higher economic growth.

Another supply side factor determining the growth rate of countries is labour, i.e. the number of workers in an economy. More workers mean more output, so should lead to economic growth. Growth rates in different countries may differ due to population differences, as an economy with a higher population, will have a larger workforce. Some countries have immigration laws which can help increase economic growth. For example, an economy can employ migrant labour, by allowing migrants into the country only if they are educated, and in a position to work. This includes only letting younger people into the country, so that there are less retired people, and so the economy has a high workforce compared to the amount of people not working. Also, government incentives can increase the workforce, by persuading unemployed people to find work. For example, if the government reduced income tax, then people would receive higher wages, and this gives people more of a reason to work, and produce goods and services. If a country employs these factors, they will have a higher economic growth rate than other countries.

Capital can also affect the rate of economic growth. If there is a higher investment in assets in one country than another’s, there could be a difference in growth rates. If countries invest in things like housing for example, it is unlikely that it will result in economic growth, but if invested in education, businesses, etc, there may be higher output in the future, and long-term economic growth. Countries in which investment differs may also experience differences in economic growth. If an economy invests in social capital, such as schools, and hospitals, there is going to be differences in ...

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Differences in technological progress will also result in a difference in growth rates. Technological advances can help increase efficiency in businesses, for example computers have taken the place of filing cabinets, and are much quicker and useful than filing cabinets. Also, technology has helped reduce costs, for example 50 years ago; a large room full of expensive equipment was needed to perform tasks which a calculator can do today. If a country invested in technology, it is likely to experience economic growth, as lower production costs, allow more money to be spent on output, which increases economic growth. In more economically developed countries, technology plays an important role in most companies, whilst in 3rd world poorer countries, there is a lot less use of computers, for example, in Ethiopia, you will find a lot less computers, and other technologically advanced equipment. Also technology can help output in the form of robots performing human tasks. Robots are more efficient then humans as they don’t need breaks, so have a higher output of productivity per person/machine than humans. The problem is that they are expensive to make. Another way that technology increases economic growth is that it creates new products for the market. People will spend income on new products, but without new products there will be less spending, so there would less or no economic growth. So overall, a difference in technological progress between countries will produce different rates in economic growth.

The quality of resources, notably labour, has a dramatic affect on economic growth rates in countries. Many economists believe that education and training is the most important factor in determining economic growth rates. Some countries like Germany concentrate on training their current workforce to increase productivity, whilst others such as the USA, focus on educating children and teenagers. The USA boasts the highest percentage of 18-24 year olds in full-time education, and experiences high growth rates. China, one of the fastest growing countries, also concentrates strongly on educating people at a young age.

Another factor influencing growth is the significance of international trade. In countries that don’t participate in international trade, such as , there is very slow or no economic growth. This is because it is very hard for one economy to produce all goods which people require. It is better to specialise in a few goods, use them, sell the surplus, and use the money to buy other goods from other economies, rather than the economy to produce everything itself, which is very inefficient. In this country, there is a much slower rate of economic growth compared to other countries.

So altogether, there are many factors influencing economic growth, and this leads to different growth rates in different countries.