Factors of economic growth

Factors of economic growth are those phenomena and processes that determine the scale of the increase in real output, the possibility of improving efficiency and the quality of growth.

According to the method of influencing economic growth, direct and indirect factors are distinguished. Straight lines are those that directly determine the physical capacity for economic growth. Indirect factors affect the possibility of turning this ability into reality. They can contribute to or limit the realization of the potential inherent in direct factors. The composition of direct includes five main factors that directly determine the dynamics of aggregate production and supply:

improving the quantity and quality of natural resources involved in economic turnover; increasing the number and quality of labor resources; improvement of technology and organization of production; growth of entrepreneurial abilities in society; growth in volume and improvement of the qualitative composition of fixed assets, growth in the volume of investments.

The abundance  of natural,  mineral,  fuel and energy resources is a very positive factor in economic growth. At the same time, such a situation is not uncommon: the country is rich in natural resources, and its economy is underdeveloped, the population is poor. And it happens in other ways.

The Republic of Belarus is poor in natural resources, but this does not mean that it is doomed to low rates of economic growth in the future. Japan’s experience shows, for example, that a country poor in natural resources has been able to rapidly move into the ranks of the world’s foremost powers.

An important factor in growth is the labor force, their quantity and quality. The simplest indicator of the quality of the labor force is the level of education, professional training, developed economic consciousness, discipline of personnel. According to this factor of economic growth, Belarus is at a higher level than other CIS countries.

A market economy brings to life and sets in motion such a factor of economic growth as entrepreneurship. The effectiveness of production and its potential largely depend on the degree to which the ability to entrepreneurship, the talent to organize business in a new way, find new ways and means of meeting the needs of people, reduce production costs and bring to the consumer what is produced, is realized.

The source of economic growth is investment, that is, investment in order to increase income in the future. The experience of Japan, for example, shows that a high level of investment in the development of national economies has allowed it to achieve and maintain the highest rates of GNP growth for a long time. At the same time, it should be borne in mind that large investments alone do not solve the problems of economic growth. What matters is how effectively they are used. In the former USSR, the share of capital investments in relation to GNP was quite high – in some years and periods more than 30%, but these funds were often dispersed on numerous objects and “construction sites of the century”, were used irrationally, often died in “long-term construction” and did not bring the planned return.

In modern conditions, the most important factor of economic growth is scientific and technological progress (STP), because it is he, the degree of use of its achievements that determine the modern, new type of economic growth.

NTP is the gradual improvement of technology and technological processes within the framework of existing scientific and technical principles and their dissemination in production.

Economists emphasize the scientific and technological revolution (NTR) – a qualitative leap in the development of science and the productive forces of society, a revolution in engineering and production technology.

Thus, STP and STD are interrelated and mutually conditioned, correlated as evolutionary and revolutionary forms of development of the material and technical base of society.

The evolutionary form of NTP is more or less permanently inherent in social production, it involves the steady development of technology, an increase in the level of technical knowledge. Scientific activity becomes an integral part of the progress of social production and is based on the appropriate infrastructure (research centers, research institutes, etc.). NTP in its evolutionary form involves the gradual improvement of technology and technology based on the same scientific and technical principles.

The beginning of modern NTR is usually attributed to the mid-50s of the XX century. NTR as a revolutionary form of NTP is, first of all,

automation of production; creation of such equipment as computers, and computerization of production, which turns informatics into a new resource and element of the technological process; discovery and use of new types and sources of energy — nuclear, thermonuclear; creation and use of new types of materials not known to nature, with predetermined properties; discovery and application of new technologies (chemical, biological, laser, etc.), which come into life under the general name of “high technologies”; formation of a new type of worker – cultural and educated, disciplined, able to exploit complex technical and information systems, thinking creatively.

The modern stage of scientific and technological development, which enters the life of society under the name of a new technological revolution (its beginning is 70-80 years), means the widespread development of “machine-free technologies”, when new principles of manufacturing and processing products without the use of machines in the usual sense (such technologies include plasma, electron-beam, radiation, biological and other types of technologies) become crucial.

The use of high technologies makes it possible to more fully meet the needs of society with a more gentle impact on the environment, and causes an increasing efficiency in the production of final products.

In the new conditions, the assessment of production results is changing: not so much the quantity as the quality of the products, increasing its scientific and technical level come to the fore.

Indirect factors have been proposed include: reducing the degree of monopolization of markets, reducing prices for production resources, reducing income taxes, expanding the possibility of obtaining loans. In the event that the change in indirect factors occurs in the opposite direction, all other things being equal, economic growth will be restrained. Thus, the sharp rise in the cost of production resources after the liberalization of prices in our country was one of the reasons stimulating industrial enterprises to reduce employment and production volumes. Indirect factors also include demand and distribution factors.

Demand factors determine the feasibility of realizing the growing volume of production. Among the most important are such demand factors as the growth of consumer, investment and government spending, the expansion of exports due to the development of new markets or the increase in the competitiveness of the country’s products in the world market. If the dynamics of demand lags behind the expansion of the natural level of real output, a situation occurs in the economy called a recession in growth rates, or a growth recession. This situation is presented in Fig. 5.2.

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Rice. 5.2. The Impact of Demand on Economic Growth

Suppose that an economic system is initially in equilibrium at point E0. The level of natural real output then rises from 15,000 to 25,000 monetary units. This is presented in Fig. 5.2. shifting the aggregate supply curve over a long-term time interval from position N0 to position N1. The short-term aggregate supply curve will also shift and take the position of AS1. Suppose that aggregate demand does not change (for example, due to tight monetary, fiscal and fiscal policies of the state), that is, the aggregate demand curve remains in the position of AD0. What will happen to the economic system in this case? First of all, there will be an unplanned increase in inventories from manufacturers. Consequently, entrepreneurs will not be able to fully realize the increasing volume of production at the prices that prevailed before. To avoid the accumulation of stocks of unsold products, they will be forced to reduce the price level, hoping thus to stimulate sales. At the same time, they will change their production plans, slightly reducing production volume, moving from point E2 to E1 along the short-term aggregate supply curve of AS1. In response, consumers will move their volume of purchases along the aggregate demand curve from E0 to E1. As a result, an equilibrium will be established with part-time employment, the unemployment rate will increase, and the economy will not be able to realize the existing potential for economic growth.

The experience of countries with developed market economies shows that the preservation of the unchanged unemployment rate in the long term is possible only with an annual expansion of the real volume of national production by 2.5-3 %. Otherwise, the share of the unemployed in the composition of the economically active population will tend to increase, and the growth of real production and real wages of workers, as a rule, will be accompanied by a decrease in real per capita incomes of the country’s population.

Distribution factors that affect economic growth include:

actual allocation of production resources by industries, enterprises and regions of the country; the current procedure for the distribution of income between economic entities in the company.

These factors affect both the ability of the economic system to grow and its efficiency. The capacity to increase output created by direct supply factors is not sufficient to expand real output at a rate commensurate with potential growth opportunities. It is necessary to allocate resources in such a way that allows them to be used efficiently in order to obtain the maximum amount of useful products. This problem is solved in its main part by the market, and in those areas where the market fails, by the state (production of public goods, neutralization of negative external effects).

Income distribution is also important for realizing the potential for economic growth. It performs this function only if it stimulates workers to increase productivity. In other words, for the economy to grow at a potential pace, it is necessary that the incomes of the owners of factors of production grow at a rate equal to the growth rate of their productivity.