Economic growth is an increment and development of national production of goods and services measured both in gross national product (GNP) or gross domestic product (GDP).
Types of Economic Growth
There are two main types of economic development:
Extensive advancement is achieved with help of expansion of resources' usage, not through the utilization quality improvement. It refers to enlargement of land areas, staff augmentation, exploration of new fields and equipment increases. This type leads to rapid growth in the amount of the produced product with no need for huge investments. However, if the economy develops extensively for a long period of time, it stagnates because of lack of implementation of new technologies and also low labor productivity due to the employees’ unqualification, which results in either higher production costs or lower workers’ wages.
Intensive upgrowth is a long-term way of economic development that involves increasing investment in efficient technologies and means of production. In addition, it assumes reorganizing the production itself or the management mechanism. It is reached through an increase in the level of professional skills of employees. All these measures lead to the reduction of costs in most parts of production. This type is mostly preferred by developed countries who have chosen to intensify their economy and focus on the development of technology and its application in the economic growth.
Determinants of Economic Growth
There are a lot of factors that can affect economic growth in multiple ways. Usually they are divided into two groups - direct and indirect elements.
Direct reasons are regulators of the physical possibility of economic growth. It mentions labor force, nature's endowments, capital stock and level of technological innovations. High-qualified labor-power produces top-grade goods and services and conducts to GDP raise as well as a large resource base, large amount of capital and state-of-the art technology.
To the indirect indicators belong:
- capital expenditures;
- credit and banking system maturing;
- commodity prices.
These factors influence the possibility of realizing resources to improve economic growth as they represent the result of capital usage and allow to approach the level of demand for the product to the level of supply.
For example, taxes’ raise leads to a profit decrease for the manufacturers, reducing their interest in production. In the same way as tax imposition, expensive goods can be the reason for a land's stagnation since fabricators seek resources at the lowest prices in an effort to maximize their profits.
Economic Growth rates
Gross domestic product, or GDP, is an annual macroeconomic measurement of all ultimate consumption goods and services manufactured in a country that are valued at the market-charge. It excludes all intermediate goods used to produce end use goods. Specifically GDP does not include the cost of tyres and engines, which are needed to build cars. Otherwise, the worth of these items would be counted twice as it is included in the final product value. GDP can be denominated in local currency, converted into foreign one at the exchange rate or be presented at purchasing power parity.
An ultimate consumption good or service is something that is not used in further production processes like raw materials, etc.
There are two types of GDP calculations:
The main difference between them is that the first one is enumerated in the current prices, while the second one is adjusted to price changes.
Gross national product. GNP calculates joint market worth of final goods and services produced by ethnic organizations or individuals in a year, regardless of their location. For example, if a company operates in a different country, then the cost of articles will be evaluated in a foreign state’s GDP but also in its’ homeland GNP.
Similar to domestic, national product can be estimated in two ways:
Nominal GNP reflects the number of goods and services created at present prices, real GNP is like the nominal one but adjusted for past period charges.