Sources / Determinants of Economic Growth

Economic growth is the continuous improvement in the capacity to satisfy the demand for goods and services, resulting from increased production scale, and improved productivity. The key sources that determine economic growth are Capital formation, Capital-output Ratio, occupational structure, Technological progress etc. A brief description of these is as follows:

Capital Formation

Capital is the foremost requirement for enhancing the productive capacity of the economy. The greater is the capital formation, greater will be the productivity of all other factors of production, and hence greater will be the total output of goods and services in the economy.

Empirical evidence suggests that there is a strong positive correlation between the rate of capital formation and the rate of economic growth. Most of the developed countries of the world have high rates of capital formation.

Capital-Output Ratio

It is very important factor which determine Economic Growth. It refers to the number of units of capital that are required in order to produce one unit of output. There is a tendency that as an economy grows the capital output ratio becomes more and more favourable. Besides, capital output ratio also varies sector to sector and industry to industry.

Capital output ratio depends upon:

• Efficiency in the use of capital;
• Quality of managerial and organizational skill;
• Marginal efficiency of capital.

Occupational Structure

Occupational Structure refers to the distribution of work force over different sectors of an economy. There is an empirical evidence that as an economy grows there is a shift of labour force form primary to secondary and then to territory sector.

With the shifting of labour from agriculture to service sector, efficiency of labour increases which in turn increases the efficiency of the economy.

Technological Progress

With improvement tin technology, same resources become more productive. For example, Computer technology has increased the output of all kinds of offices many times. For technological advancement, we need to have quality of education and well equipped research and development. Govt Initiatives in this regard play much important role.

How to ensure high Economic Growth Rate?

The above description makes clear that higher economic growth can be ensured by increasing in the rate of capital formation and by generating forces that increase the productivity of capital.