FACTORS AFFECTING ECONOMIC GROWTH

The primary driving force of economic growth is the growth of productivity, which is the ratio of economic output to inputs (capital, labor, energy, materials and services (KLEMS)). Increases in productivity lower the cost of goods, which is called a shift in supply. By John W. Kendrick’s estimate, three-quarters of increase in U.S. per capita GDP from 1889 to 1957 was due to increased productivity. Over the 20th century the real price of many goods fell by over 90%. Lower prices create an increase in aggregated demand, but demand for individual goods and services are subject to diminishing marginal utility. Additional demand is created by new or improved products.

Demographic factors influence growth by changing the employment to population ratio and the labor force participation rate. Because of their spending patterns the working age population is an important source of aggregate demand. Other factors affecting economic growth include the quantity and quality of available natural resources, including land.