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Economic Growth

Last updated date: 24th May 2024
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Definition of Economic Growth

Economic growth can be defined as an increase in the potential output level in an economy over a certain time period. It can be represented by a rightward shift that is seen in the production possibility frontier. Economic growth also causes a shift in the Long Run Aggregate Supply curve.

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In some cases, economic growth can also be determined by a change in the GDP or the Gross Domestic Product of a country. Economic growth changes with the real income of a nation and it can be defined as the income that is adjusted properly for inflation in a country. 

Economy and the Business Cycle 

The major fluctuations in the economy can be called the business cycle that results in the change. There are 4 stages in the business cycle known as the boom, recession, slump, and recovery. In the case of a boom, the aggregate demand will increase, and hence there will be an increase in the output that will ultimately result in economic growth. In this article, students will learn how to deal with slow economic growth and the impact of economic growth on business. 

Types of Growth in Economy

Generally, there are 3 different types of growth that take place in an economy. There is the trend growth, potential growth, and actual growth. Actual growth is the change in GDP that happens over a certain period of time. Actual growth is potentially affected by a change that takes place in the efficiency of resources as well as the aggregate demand in the economy. 

Potential growth can be defined as the rise in the quality and quantity of all the resources that are present in the economy. Potential growth could take place without having actual economic growth. Trend growth can be defined as the increase that is expected to happen in the potential output over a certain period of time. It can basically be used to determine the growing capacity of the economy without the consideration of inflation. 

What are the Economic Growth Determinants?

There are some economic growth determinants that decide how economic growth experiences change in a nation. 

Technological Progress

There are a few factors that decide the economic growth of a nation. Technological progress is one of them. When it comes to the productivity of technology, it can have an impact on the potential output of the nation. With proper supply in the economy, consumers are able to spend more money. Technological progress also increases the efficiency of production due to the fact that production cost is reduced. Hence, it would cause economic growth. 

Capital Investments

Economic growth can also be determined with the help of capital investments. With a significant amount of proper capital investments in machinery, factories, and equipment, the economy of a nation can be developed. When a business firm decides to make some investment in new machinery, the potential output will experience an increase. This will lead to stable economic growth. 

Quantity & Quality of Labour

Another important factor that plays an essential role in the growth of the economy is the quality and quantity of labour. With the increased amount of labour, there will be more economic growth. With more workers, the potential level of output will also experience an increase as well. Besides the quantity of labour, the abilities and skills are also pretty important. 

Confidences and Expectations

According to the economic growth indicators and definitions, one of the main causes that lead to economic growth is the confidence of people as well as the expectations of the economy. Firms will eventually increase their investments if they are confident about the return rates on the investments. With more planned investments, the economy will also experience growth. This is due to the fact that the addition of some capital stock in the economy of a country will be used to produce better services and goods. If the consumers tend to have more confidence regarding the future, they will also increase the rates of consumption and hence spend more on the economy. 

Natural Resources

Another one of the causes for economic growth is the natural resources that a nation has. Resources play a pretty important role because the nations that have more natural resources will be able to produce services and goods. These goods and services will also have low prices and costs attached to them when compared to the countries that have to import these resources. With low costs, the companies and firms will be able to increase the output and hence export more goods to other nations. This will lead to an increase in the current account of the country and hence will quicken up the slow economic growth. 

Impact of Economic Growth on Business 

When it comes to the impact of economic growth on businesses these days, there are a lot of factors to be taken into consideration. Economic growth can provide greater potential for:

  • An increase in the profits.

  • A significant rise in the living standards on an average level.

  • Creation of new employment opportunities for the people in the country.

  • An increase in the tax revenues for the government can be used for funding more government services. 

  • Improved confidence in business. 

  • Increase in capital investment. 

  • Technological innovations. 


This article above provides details on the economic growth of a country. Students will be able to use this article to gain more information regarding the topic. 

FAQs on Economic Growth

1. What are the different types of growth in the economy?

Basically, there are 3 different growths that happen in an economy. One of the types is actual growth. It can be defined as the change that takes place in the GDP of the nation. Another is the potential growth. It can be defined as the rise in the quantity and the quality of the resources that the economy has. Potential growth doesn’t depend on actual growth in the economy. Trend growth can actually be defined as the increase that is expected to happen in the potential output level of the nation in the future. It signifies the capacity of the economy of a nation to grow over a certain period of time without considering the inflation in the nation. 

2. What is the impact of economic growth on business?

According to the economic growth theory, economic growth has a huge impact on businesses. Economic growth tends to affect the living standards as there is an increase in the average standards of living in the country. It also causes an increase in the overall profits that the nation acquires. Economic growth also leads to the creation of more employment opportunities for the people in a country and thus tackles the problem of low employment rates. Due to economic growth, there is also an increase in government tax revenues. This can lead to better services in the government and more funding opportunities as well. Apart from that, economic growth also has a role to play in the increase of capital investment as well as technological innovations in a country.