Question

The economy of a country has been growing at an annual rate of 8%. Determine the causes and effects of economic growth in this country.

Answer 1

The economic growth rates gives information on how fast the economy is growing,and is calculated by comparing the economic output (measured as the Gross Domestic Product or GDP) of two subsequent periods.

The two main determinants of GDP/economic growth are:

• Productivity increases caused by more efficient use of inputs (labor, capital) and implementation of innovation.
• Accumulation of physical capital

Effects of economic growth

• Larger amount of goods and services are available in the country and ready for consumption
• High employments levels, as workers are necessary to manufacture that large quantity of goods and services. As GDP has grown, so have done employment figures.
• More employment brings boosts on aggregate demand and generate further growth as business will keep on trying to serve the whole demand.
• As demand grows it is quite likely that prices do so too, therefore economic growth would increase the inflation rate (not necessarily a problem if such growth is not too large and remains stable).
• Productivity increases and implementation of innovations make national firms more efficient and competitive in the international markets.

Answer 2

Cause of Economic Growth-
Investment in physical capital
Investment in human capital

Effect of Economic growth-
Social and community development
Improvement in standard of living