Q+2+-+Development

2. What are the determinants of economic growth?

The determinants of economic growth can be broken into three sections of the economy; supply factors, institutional factors, demand factors. It is important to note the difference between potential growth and actual growth in the way they are differently represented on a graph (see bellow). Potential growth, in the case of measuring supply potential and institutional factors, occurs when there is an outward shift in the PPC and a shift to the right in the LRAS curve. This shift is affected by supply factors that can be identified in four separate categories; natural factors, human capital factors, physical capital & technological factors, institutional factors. Natural factors affect the quantity and quality of the factors produced thus determining economic growth. This is similar to human capital factors in that the quantity of human capital and the level of education the labor force has received will determine the ultimate success rate of the economy in terms of growth. Physical and technological factors include the quality and quantity of the capital used to produce a good or service used to grow the economy. Institutional factors are known as factors that sufficiently support economic activity and support economic development, such as; banking systems, education systems, health care, infrastructure, political unsuitability. Demand factors can be identified as households, businesses and governments that will purchase the output of goods and services produced by an economy thus encouraging its growth according to the theory of the macroeconomic flow diagram that shows the relationships relating to the main factors of expenditure and income. These demand factors, in organization with supply and institutional factors allow an economy to grow healthily as long as they are not limited by the consequences of economic growth. Making use of Singapore as an example which increased its land area from 581.5km to 697.2km in 1965 as a result of landfill methods in order to increase the natural supply factors available to them and thus receiving the rewards of economic growth. This growth can be described through the use of the bellow graph that represents Singapore's growing economy from PP1 to PP2 as a result of the increase in the determinant of natural resources.