Economic Theories
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Economic Theories
Economic Growth
The economic growth of a country is mainly determined by two variables, namely, capital stock and labour force. These two variables are further influenced by various sub variables like human endowments, social attitudes, political conditions and historical accidents. The following describes broadly the variables mentioned above.
Economic Factors: A country can grow economically only if the rate of growth of output exceeds the rate of growth of population by a significant margin. The following are further classifications of the economic factors.
- Rate of capital formation: Capital formation is the most crucial and strategic determinant of economic growth. The history of all the advanced countries bears testimony to the fact that their periods of expansion have always been characterized by a high rate of capital formation. Capital formation implies not just the capacity to save but capacity to invest into productive uses. Usually the structure of the economy together with governmental incentives or encouragement play a major role in channelling the capital savings into capital investment to boost economic growth.
- Capital-Output Ratio: The capital output ratio is also known as Investment Income or Capital Coefficient. The capital-output ratio states the relationship between capital investment and the emergent output consequent upon the investment. A lower capital-output ratio is desirable as it shows the efficient use of capital. The capital-output ratio is determined by a large variety of factors, such as, the degree of technological development, rate and pattern of investment, density of population, quality of managerial and organisational skill, etc.
- Rate of Growth of Population: As pointed out earlier, economic growth depends on the excess of rate of output over the rate of growth of population. The rapid growth of population in most of the underdeveloped countries thus negates the economic development in such countries.
Socio Cultural Factors: The socio cultural attitudes of people in developing and under developing countries also retard economic growth. The socio cultural aspects can be due to certain social taboos, social institutions which act as barriers to economic thought and economic pursuits, religion, literacy and other such social factors.
Political and Administrative Factors: The existence of a strong, competent, sympathetic and incorrupt administration is perhaps the sine qua non for accelerated economic growth. It is this particular factor that is more important than capital formation.
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