Sources of Economic Growth/Factors Affecting Economic Growth

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Economic growth is the steady procedure by which the productive capacity of the nation or economy is increased over time to bring an increased standard of living and national output. It is affected by different economic as well as non-economic factors. The different sources of economic growth or factors affecting economic growth are pointed by different economist as follow;

Economic Factors Affecting Economic Growth

The process of economic growth/development is an extremely complex phenomenon and affected by many and varied factors such as political, social, and cultural factors.

According to Prof. Ragnar Nurkse, “Economic development has much to do with human endowments, social attitudes, political conditions, and historical accidents. Capital is a necessary but not a sufficient condition of progress.”

The supply of natural resources, the growth of scientific and technological knowledge too have a strong bearing on the process of economic growth. The major economic factors affecting economic growth are briefly explained below.

Natural Resources

It is believed that economic growth is positively related to the endowment of natural resources. It means economic growth is probable when an economy is adequate in natural resources. Natural resources include land, minerals, oil, water, forest, climate, etc. The quality and quantity of natural resources plan an important role in economic development. Only the availability of natural resources does not constitute economic growth. Resources should be exploited and utilized to get economic growth and economic development.

The exploitation and utilization of natural resources depend on the quality of human resources and the state of capital and technology available in the country. If the country has sufficient natural resources and highly skilled and motivated human resources then the country can do a miracle in economic growth like the United States, France, Germany, U.K., Canada, and Australia. We have countries like Saudi Arabia, U.A.E, Kuwait, etc. who are rich in only one resource and an economically advanced one. Similarly, there are certain countries like Hong-Kong, Singapore, and Taiwan which have small resource endowments but a very high rate of economic growth.

Nepal is believed rich in natural resources, has remained underdeveloped because of a lack of exploitation and utilization of resources for productive purposes. Resources in Nepal are not been used effectively due to the technological deficiencies

Capital Formation

With no accumulation of capital economic growth is not possible. Capital can be defined as man-made means of production. It includes machinery, plant and building, means of transport and communication, electricity, plants, and social overheads like roads, railways, school colleges, hospitals, etc. An increase in the stock of man-made factors of production over time is called capital formation. Capital formation enhances the availability of capital or workers. High capital-labor relation enhances the productivity of labor. Thus, a larger volume of goods and services can be produced at a particular point in time with a good combination of capital-labor mixture.

Capital formation includes three self-feeding inter-related steps as the creation of real savings and rise in them, the existence of credit, and financial institutions to mobilize savings to divert them in desired channels and to use them for investments in capital goods.

In developing countries, gross domestic saving is not sufficient for economic growth. So along with an increase in real domestic saving foreign aid and borrowing also play an important role in capital formation. A developing country has to import huge quantities of capital goods and if there is no foreign aid coming in sufficient quantity, developing countries will have to face serious adverse balance of payment. International financial and economic institutions like the World Bank, IMF, and ADB also provide loans at concessional rates to the developing countries for financing their capital expenditure and to support their economic growth and expansion.

Technological Progress

Technological changes are considered the most essential and important factor in the process of economic growth. Technological adaptation is related to change in methods of production which are the result of some new techniques of research or innovation. Changes in technology lead to an increase in the productivity of factors of production.

Economist Simon Kuznets traces five distinct patterns in the growing technology in modern economic growth; scientific discovery or addition to technical knowledge, an invention, an innovation, improvement, and the spread of innovation usually accompanied by improvement.

The development of technology can produce larger output for a given amount of means of production, and time. The invention, telecommunication, computers, microchips are a few examples of technological development within the last decades.  Evidence from economic history showed that countries achieved a longer and stride in the field of economic growth through technological developments and advancement. Countries using inefficient technology have grown at a slow pace.

Technological changes in developing countries can be noticed by observing the pace of use of natural resources, best use of capital and increase in MEC, saving of time, specialization, expansion of industry, and improvement in labor efficiency.

Human Resource

Generally, human resource refers to the population of the country. In economics, it refers to healthy, educated, and skilled manpower. So, human resource represents the process of improving the quality and efficiency of the people. Human resource plays an important role in the overall development of a country. Without human resources, all the other resources like capital, natural resources as well as other productive resources remain passive. Thus, efficient human resources are necessary to mobilize them.

The relationship between human resources and economic growth or economic development has been widely recognized at all levels. Human development is considered an integral part of the process of economic development of any region. Thus, development in the quality and quantity of human being especially of the working population accelerates the development activities. An educated, healthy, and wealthy individual has better prospects for innovation, invention, and entrepreneurship than other individuals without those attributes. Improvement in all those attributes ensures an increase in the capability to better manage and utilize the available resources and thus enhance the utility of those resources.

Population Growth

Population growth is the source of labor supply. However, population growth should be normal. A flying rise in population retards economic progress. Population increase is more desirable in the under-populated country. Population growth should be less than economic growth to increase per capita income.

Non-economic Factors Affecting Economic Growth

Apart from the above-mentioned economic factors affecting economic growth, certain non-economic factors like socio-economic, cultural, psychological, and political factors are also equally significant to develop the economy. In the modern approach, economic development has to consider all aspects of social behavior like the establishment of law and order, conscientiousness in business dealings, the relationship between the families, literacy, and familiarity with mechanical gadgets, and so on. Some of the major non-economic factors affecting economic development are political factors, social and physical factors, education, urbanization, religious factors, and so on.

Political Factors

The political system, political stability, and strong administration are essential and helpful in modern economies and for economic growth in such economies. Countries like Germany, the USA, the UK, France, Australia, Japan, etc. have reached the level of highest economic growth because of political stability and strong administration.

In most of the poor and developing countries, there is political instability and weak administration that have largely influenced their economic development and growth programs. Thus, to have faster and progressive economic growth having efficient, strong, and incorrupt administration is necessary. Clean, just, and strong administration and responsive political system can put an economy on the way to rapid economic development. No country in the world has achieved greater growth and development without positive stimulus from a responsive government.

Social and Psychological Factors

In modern times economic growth process has been largely influenced by social and psychological factors. Social attitudes, social values, and social institutions change with the expansion of education and transformation of culture from one society to another.

The enlightenment and the industrial revolution in Europe and other countries were the outcomes of the spirit and adventure that resulted from the expansion of education that led to new discoveries and inventions and consequently to the rise of new entrepreneurs. Social attitude, values, and institutional setup changed. The joint family system was replaced by the new single-family system which led to rapid economic advancement in those countries.


Education is the main vehicle of innovation, discoveries, development, and expansion. Those countries have achieved greater and massive development and growth where education is widespread. Without education, no country can achieve optimum utilization of economic and social resources and can adopt the modern practices of advancement. Only education can raise people’s productivity and creativity and thereby promote entrepreneurship and technological advances. It also supports just and equitable distribution of opportunities and incomes.


Urbanization is a process of making an area advanced and modern with all the infrastructures and services. It creates enormous social, economic, and environmental changes and advancements that provide an opportunity for sustainability with the possibility of effective and productive use of resources, creates more effective use of techniques, and at the same time creates a duty to protect the environment and natural ecosystem. In poor and agrarian countries, the structural change should begin with a change in the size of the population in rural and urban sectors. Composition of economic output changes with urbanization in efficient ways.

Religious Factors

Religious factors and beliefs also affect the economic growth of the state. Particular religious thought gives rise to a peculiar sense of self-realization. For instance, the Hindu religion encourages faith in fate and prevents people from working hard. They are educated to remain satisfied with their lot and to hate risk and enterprise.

Religious believes in south Asian countries give more sense of spirit rather than matter and so the nations are still backward in spite of having huge potentiality. In Nepal, the Sudurpaschim Pradesh seems full of religious thoughts and they are more spirituals rather than materialistic.    


There are different factors affecting economic growth. Economic growth is the steady procedure by which the productive capacity of the nation or economy is increased over time to bring an increased standard of living and national output. It is an issue of reducing mass poverty, changing the structures of the economies, and making economic advancement in wider areas of the nations. Economic development has much to do with human endowments, social attitudes, political conditions, and historical accidents. Aptitudes, abilities, qualities, capabilities, and facilities are the main determinants of economic development.

Both economic, as well as non-economic factors, affect the development of the nation. Economic factors are those that directly influence the development of an economy. The growth of the economy positively moves with changes in these factors. On the other side, there are different non-economic factors as well consisting of cultural institutions, moral and ethical values, and social and political organizations. Thus, economic growth will be sustained if the country is able to combine economic as well as non-economic factors in efficient ways. 


Ahuja, H.L.(2015). Economic Development. New Delhi: S. Chand & Company Pvt. Ltd.  

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