Contribution of different factors to the economic growth of a country!

 

    The economic growth of a country is one of the primary things that need to be considered by every citizen in the country. It determines the standard of living in the country. For example, let’s take a family. The family’s survival depends upon the income it got. The more income of the family leads to no debt, no problems, and nothing, thus living a higher standard of life. Now, take this family into a whole country. If there is no debt and there is a stable income for the country, it will produce more help to the citizens and it will bring the country on a happy trajectory. But what if it was vice versa? People don’t get basic things, there will be huge debt, and everything goes down. Thus, we will be on a bad trajectory. This thing classifies a country as a developed or developing country. Thus a good economy results in good living conditions for the people of the country, whereas a bad economy will greatly affect the people. A good government should manage the economy and bring the country on a happy trajectory. The economic growth of a country depends upon various factors, namely

• Gross domestic product
• GDP (Gross Domestic Product) per capita
• GNP (Gross National Product)
• Consumer spending
• Exchange rates
• Stock Market
• Interest rates
• Government Debt
• Rate of Inflation
• Unemployment
• Balance of Trade

    All these factors of the economy are connected to one another. An increase or decrease in one factor will greatly affect the other. Thus the only possible way to increase the economic status is by giving money to society, as we have seen at the starting. This is done by borrowing money, which is either by printing it or by getting it from other countries. But it can’t be done in an unusual manner which could tend to decrease the economic growth even further down. Now, let’s say there is some money surplus in the economy. It can be used by various members to increase their growth, which in turn increases the economy (standard of living). Now let’s dive into the first part.

GDP (Gross Domestic Product)

Process of GDP

    One of the most important contributions that are made to the development of the economy is GDP (Gross Domestic Product). Gross Domestic Product is a type of calculation that is made by all finished goods and services made in the country. For example, products like Cars, household items, food products, and services like entertainment, medical consultation, etc. So when a member is buying these goods from the money he got, the GDP is counted.  Also, Goods and services produced only within the country, calculate its GDP. Products imported from other countries are not counted in the country’s GDP. Also, GDP is not calculated that is happening in an informal sector, meaning not a registered good. So we can tell GDP as,

GDP= C+I+G+NX

Where,

C is the Consumer spending

I is the Investment

G is the Government spending

NX is the Net Export (Exports – Imports).

    All these factors of GDP make contributions to the Goods or the investment made. The GDP is calculated by a price range in the past year. So, the increase in the price of the products does not drive the GDP. The GDP counted every year with the current year's prices is called Nominal GDP, whereas with the base-price range is called the Real GDP. We need to always focus on the Real GDP in the growth of the economy. Thus the increase in the factors leads to the contribution of the increase in GDP and makes happier life for all the people in the economy through increased income.

GDP Per capita

    GDP Per capita is also similar to the counting of GDP. But unlike GDP, which counts off all of the goods and services together, GDP per capita counts the average goods and services that are spent per citizen. A country must gather this data to get average economic growth from every citizen. For example, the country UK and India both have the same GDP count. But when compared to the GDP of per person (GDP Per Capita) in the UK with the GDP Per Capita of India, it is considered lower for India in contribution to economic growth. This means that India could achieve better GDP with its population than the UK. The GDP Per capita can be calculated by,

GDP Per Capita= (Total GDP/Total Population) *100

GNP (Gross National Product)

    GNP is also similar to GDP which concentrates on goods and services. But unlike GDP, which only concentrates on the goods and services produced within the country, the GNP concentrates overseas. For example, let’s say a company which has its origin in Country X has opened a branch in Country Y. In GNP, the company’s profit in the country Y is added to the profit in Country X. While the value of the products made (let’s say a car) is added to the Country Y. So the product value is added to the country and the profit gained is calculated in the origin country. So, for the same product, both GDP and GNP are calculated. So every country has a GDP and a GNP. The difference in amount between the GDP and GNP is called NFFI (Net Foreign Factor Income). The NFFI could be both positive and negative.

The formula for calculating GNP is,

GNP=GDP + Net Income (Domestic resident earning in abroad- Non-resident earning in our country).

Process of GNP

Consumer Spending

    Consumer spending is also the part of the GDP which tends to increase the economy. The government always makes the people spend more money to develop the economy. Let’s say a person has more income during a certain period. The person will spend the money or save it in a bank account. The economy gets increased by consumer spending, only when the money gets in circulation. Even when the person deposited the money in a bank account, the money does not simply lie there and gets circulated as a loan to other people. Thus one way or the other, the money gets circulated in the economy. Suppose, if a person takes that loan to buy a car, the money gets transferred. And the car owner deposits his money into another bank account to increase further spending. As more goods are bought, it increases more production which in turn increases the Gross Domestic Product and the economy.

Process of Consumer Spending

Stock Market

    A stock market is a type of market where the shares of a company are bought and sold by individuals and other companies. Through this trade, a large amount of profit is generated by individuals. Even if the stock market varies abruptly, the economy does not vary as much. Sometimes we ought to see, that even though the economy was shrinking the stock market rises, owing to a slight build-up in the economy. This is due to the belief of the people in the stock market. When stock prices rise, it increases the wealth of the people and increases the consumer’s spending, which tends to increase the GDP and in turn the economy.

Exchange rates

    The exchange rate is also one of the main considerations in the growth of the economy. It denotes the value of a currency to another country’s currency. If a country’s currency is lower than another country, then the currency value of the lowered currency decreases. Let’s compare the dollar with the Indian rupee. As of  2021, $1 =₹74.27. Thus the rupee will have a lower value than the dollar, which means, India should spend more rupees to buy a dollar. The exchange rate can be mainly observed during international trade. If there is too much of exchange rate, then we should buy the imported products by giving more money. So we may run on a lower money supply and the economy becomes down. The exchange rates are mainly affected by the amount of inflation, Interest rates, and the balance of trade in the country.

Rate of Inflation

    Inflation is one of the main parts of the exchange rates that need to be considered in economic growth. Inflation causes the currency power of a particular country to decrease. With the decrease in the currency value, the prices of goods will go high which in turn decreases the purchasing power of the people (Less spending). Thus it leads to less production, which leads to a slower economy. But there are also some advantages to the slight increase in inflation. This advantage reduces debt and increases the income of people causing increased tax and a slight increase in productivity growth. Thus the inflation should not be too much or not too low. If the inflation was very low, it is called Deflation, which causes huge demand in the production of goods, thus decreased wages, high prices, and unemployment.

Effect of Inflation

Balance of trade

    Balance of trade is the relationship of trade between two or more countries. When a country imports more goods than exporting, then the demand for the imported product increases. Thus we have to pay more to import the product. So the currency value of one country decreases, with respect to another country. So the country gets more currency, by printing and borrowing, thereby causing inflation and reducing the economy.

Effect of unequal trade

Interest Rates

    Interest rates are mostly co-related with inflation, which together alter the exchange rates. A government should carefully manage the balance between interest rates and inflation. When the interest rates are low, it increases consumer spending and boosts the economy. When there is too much of consumer spending, it creates inflation. Also if the bank lowers the interest rate, it does not create foreign investors. But if the interests are high, it decreases consumer spending, lowers inflation, attracts foreign investors, and makes the exchange rates go low.

Effect of Interest Rates by Banks

Unemployment

    Unemployment is also one of the major issues in the growth of the economy. It wastes human resources. Also if any unemployable person does not get any income, it leads to low spending, which in turn leads to low income for the government. Thus, lowering the economy.

Government Debt

    Government debt is a kind of debt, which is created by the government by borrowing money from the central bank and foreign countries, by giving securities. This debt has to be paid with interest to run a smoother economy. However, an increase in debt could largely trouble the economy. Due to the increase in debt, the government increases taxes and cuts programs. This could also cut national savings which makes the government unable to invest in private firms. Thus productivity grows lesser, which leads to lower wages for people, and thus lower spending and lower economy.

Creation of Government Debt

    Thus we can simply determine the health of the economy when there is more productivity, which can lead to more buying and selling in the economy. This productivity can be increased by more income in the economy. It is done by a country, either through printing money or through borrowing it. But this creation is done through the respect of National Debt. Through our next post, we can take a deep look at the process of money creation with respect to the national debt.

How money creation is done in the economy? (PART-1- Commercial Banks)

How money creation is done in the economy? (PART-2- Open Market Operation)