Why Is Economic Growth Important

Economic growth is the expansion in the production of goods and services (the economy) over a certain period of time. Economic growth can either be described as nominal economic growth (meaning the economic growth includes inflation) or real economic growth (meaning nominal economic growth minus inflation). When there is nominal economic growth, the economy is not shrinking, but it's not necessarily growing either. Ideally, nations are always seeking real economic growth. Economic growth can greatly contribute to the quality of living of citizens.

Causes of economic growth

Economic growth occurs when there are positive external forces in the economy. Positive forces on the economy could include higher wages, which increases disposable consumer income, encourages consumer spending, and increases consumer confidence. Positive change could also include lower income tax, which again creates more disposable income and higher spending. Accelerating housing prices can also spur economic growth, as homeowners create more wealth and feel more comfortable spending excess income. Higher home prices create consumer equity. Families purchase homes, which grow in value, creating wealth.

Why is economic growth important to a nation?

According to the World Resources Institute, economic growth is one of the most important factors in lessening the effects of poverty in developing nations. Gross Domestic Product (GDP) plays a role in determining the health and welfare of people within a nation. "There is a strong correlation between gross domestic product (GDP) per capita and indicators of development such as life expectancy, infant mortality, adult literacy, political and civil rights, and some indicators of environmental quality," states the World Resources Institute. Other factors, such as the healthcare and educational systems can also play a role.

In addition to health and well-being, economic growth is vital to the success of the business system. In order for businesses to grow and expand, they must be able to sell their products. In order to sell their products, consumers must have disposable income and access to jobs. In order for there to be available jobs, there must be thriving businesses. Economic growth is a cycle. When one part of that cycle (thriving business, jobs, disposable income) suffers, economic growth also suffers. Because of this, the economic cycle can also work in reverse. When there is no demand for products, businesses fail. When businesses fail, there is a loss of jobs. The loss of jobs creates even less demand for products. The economic cycle then just falls further and further, creating a spiral effect.

Businesses that sell luxury items are at more risk than businesses that sell necessities. Consumers are less likely to buy high-priced items such as jewelry, boats, or RVs when the economic growth is slow. Consumers will, however, continue to purchase food, medicine, toiletries and essential items.

© 2014 Life123, Inc. All rights reserved. An IAC Company