There are five important sources of economic growth:
- Increase in the supply of labour, i.e., the number of people working or available for work.
- Along with the supply of labour, the knowledge and skill level of the labour also influences the economic output of a country.
- Increase in the availability of physical stock due to increased investments.
- Improvement in technology, increases productivity.
- Increased availability of natural resources, both renewable and non-renewable, also accelerates economic growth.
The economic growth occurs when real output in the economy increases over time. Sustainable economic growth rate is the rate of increase in an economy’s GDP that can be sustained for a long time without creating other significant economic problems.
We can state the potential GDP as follows:
Potential GDP = Aggregate hours worked x Labour productivity
We can estimate the sustainable growth rate of an economy by estimating the growth rate of labour force and growth rate of labour productivity.
Potential growth rate = Long-term growth rate of labour force x Long-term labour productivity growth rate
It is important for a country to achieve a sustainable growth rate because the economic growth directly affects the long-term equity returns.