Factors affecting economic development and growth


Published on

Published in: Education
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Factors affecting economic development and growth

  1. 1. Factors Affecting Economic Development and GrowthDefining economic growthSustained economic Economic growth is best defined as a long-term expansion of the productivepotential of the economy. growth should lead higher real living standards and rising employment. Shortterm growth is measured by the annual % change in real GDP.Industries experience cycles of economic growth and contraction based on many factors. These includethe overall health of the markets, consumer preferences and even seemingly unrelated world news andevents. Although some companies perform better than others in their industry, the global factors thataffect the industry as a whole must be contemplated when planning to start or grow a business.InflationLow in most countries; distorts business decisions; wage inflation compensates for price inflation.Interest RatesInterest rates can impact the growth of an industry in several ways. In large-ticket industries such asvehicle manufacturers or cruise companies, an increase in interest rates can prevent customers fromborrowing to finance the purchase of these types of products and services. High interest rates also detercompanies from investing in new capital and expansion. On the other hand, falling interest rates canstimulate industries to grow, which can lead to innovation and higher employment levelsTax LevelsCorporation tax afeects how much firms can invest or return to shareholders.Income tax and sales tax (egVAT) affect how much consumer have to spend, hence demand.Currency StrengthThe value of the U.S. dollar compared to other foreign currencies such as the yuan, yen and the pound isimportant even for companies that do not import or export goods. Consumers have a choice to purchasegoods or services originating in the United States or in other countries. If the U.S. dollar strengthens,companies in the industry that purchase inputs from other countries are able to be more competitive inpricing. In industries that are heavily reliant on foreign raw materials and processing, such as the clothingindustry, the entire sector can be lifted or depressed with a strengthening or weakening of the dollar.
  2. 2. Government InterventionMany industries are regulated by the government in one form or another. Government agencies such asthe Environmental Protection Agency, the Food & Drug Administration or the U.S. Department ofAgriculture maintain standards that all operators in an industry must follow for the safety of consumers,employees, or natural resources. Some industries are more heavily regulated than others and new lawsand rules can shake up an entire industry and depress growth. For example, new child toy safety lawsimplemented under the Consumer Product Safety Improvement Act in 2009 threatened to wipe out manysmall toy producers as the requirements to test and certify the toys were cost-prohibitive to all but largetoy manufacturers. Proposed changes to the Act may help alleviate the burden on small manufacturersand resellers.Environmental ImpactEconomic growth in an industry can be impacted not only by the environmental effect the products orservices have but also by consumers perceptions of that impact. For example, the market for fur appareldeclined drastically over the course of a few years in the 1990s when consumers perceived that raisingand killing small animals for their fur was both inhumane and a poor use of land. Although the industry isonce again picking up with international demand, the number of fur farmers in the country hassubstantially declined. If the public views an industrys products or services as being harmful or unsafe,most companies within the sector can experience a marked decline in sales quickly.Overall Economic HealthThe economic state of the country and consumer confidence can also spur growth and development orharm it. In recessionary times, consumers begin limiting their purchases to the essentials, foregoingluxury or big-ticket items. Companies also scale back production, hiring and the development of newproducts and services to ensure that their finances can weather the storm. In periods of overall economicgrowth, these companies once again expand. The opposite is true in industries that deal in basicconsumer goods that everyone needs regardless of the economy: food, diapers, and staple goods.Demand picks up for these necessities as consumers stock up on them and substitute basic goods forluxury goods (example: people buy more groceries to eat in rather than go to a restaurant). In inflationarytimes, the demand for staple goods declines as consumers can afford more luxury substitutes.The Business CycleEconomic Activity is always punctuated by periods of growth followed by decline, simply because of thenature of trade.The UK economy has been characterised by periods of boom and bust.Government policycan cause axcerbate or mitigate such trends, but cannot abolish the business cycle. (Industries whichprosper when other are declining are called counter cyclical industries.)