Answer to Question #49652 in Macroeconomics for Stephanie

Question #49652
What factors contribute to high rates of economic growth for a nation? List four factors that contribute to economic growth and explain how each of these factors contributes to economic growth. Show economic growth using a production possibilities graph. Identify any abbreviations used.
Expert's answer
Economic growth is the increase in the market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.
Factors affecting economic growth:
1) Productivity
Increases in productivity have historically been the most important source of real per capita economic growth. Increases in productivity lower the cost of goods, which is called a shift in supply. Over the 20th century the real price of many goods fell by over 90%. Lower prices create an increase in aggregated demand, but demand for individual goods and services is subject to diminishing marginal utility.
2) Growth phases and sector shares
Demographic factors influence growth by changing the employment to population ratio and the labor force participation rate. Because of their spending patterns the working age population is an important source of aggregate demand. Other factors affecting economic growth include the quantity and quality of available natural resources, including land.
Industrialization creates a demographic transition in which birth rates decline and the average age of the population increases. Women with fewer children and better access market employment tend to join the labor force in higher percentages. There is a reduced demand for child labor and children spend more years in school.
3) Income equality
According to research by Harvard economist Robert Barro, there is "little overall relation between income inequality and rates of growth and investment". According to Barro, high levels of inequality reduce growth in relatively poor countries but encourage growth in richer countries. Princeton economist Roland Benabou research shows that inequality does not matter per se to growth, but "inequality in the relative distribution of earnings and political power" does matter.
4) Business cycle
Economists distinguish between short-run economic changes in production and long-run economic growth. Short-run variation in economic growth is termed the business cycle. The business cycle is made up of booms and drops in production that occur over a period of months or years.[citation needed] Generally, economists attribute the ups and downs in the business cycle to fluctuations in aggregate demand. In contrast, economic growth is concerned with the long-run trend in production due to structural causes such as technological growth and factor accumulation. The business cycle moves up and down, creating fluctuations around the long-run trend in economic growth.

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