This document discusses various factors that determine economic growth, including monetary policy, fiscal policy, coordination between monetary and fiscal policy, and factors like capital formation, entrepreneurship, technological progress, and population growth. It also outlines problems that can hinder economic growth, such as poverty, capital shortage, rapid population growth, and difficulties adopting new technologies.

1. Contents
 MEANING OF MONETARY POLICY
 MEANING OF FISCAL POLICY
 COORDINATION OF MONETARY & FISCAL POLICY
 MEANING OF ECONOMIC GROWTH
 FACTORS DETERMING ECONOMIC GROWTH
 PROBLEMS OF ECONOMIC GROWTH

2. MEANING OF MONETARY POLICY
Monetary policy deals with all those monetary and non-monetary
measures and decisions that affect the total money supply and circulation
in the economy . It also includes several non-monetary measures like
wages , price control , income policy , budgetary operations taken by the
government which indirectly influence the monetary decisions and
measures in an economy .
MEANING OF FISCAL POLICY
It refers to the policy of the government spending , taxing , borrowing
and debt management . It is defined as the governments program of
taxation , expenditure and other financial operations to achieve certain
well-defined national goals .

3. COORDINATION OF MONETARY AND FISCAL POLICY
Fiscal policy and monetary policy are the two tools used by the state to achieve its
macroeconomic objectives. While for many countries the main objective of fiscal policy
is to increase the aggregate output of the economy, the main objective of the monetary
policies is to control the interest and inflation rates. The IS/LM model is one of the
models used to depict the effect of policy interactions on aggregate output and interest
rates. The fiscal policies have a direct impact on the goods market and the monetary
policies have a direct impact on the asset markets; since the two markets are connected
to each other via the two macro variables output and interest rates, the policies interact
while influencing output and interest rates.
Traditionally, both the policy instruments were under the control of the national
governments. Thus traditional analyses were made with respect to the two policy
instruments to obtain the optimum policy mix of the two to achieve macroeconomic
goals, lest the two policy tools be aimed at mutually inconsistent targets. But more
recently, owing to the transfer of control with respect to monetary policy formulation to
central banks, formation of monetary unions (like European Monetary Union formed
via the Stability and Growth Pact), and attempts being made to form fiscal unions, there
has been a significant structural change in the way in which fiscal and monetary
policies interact.

4. There is a dilemma as to whether these two policies are complementary, or act as
substitutes to each other for achieving macroeconomic goals. Policy makers are viewed
as interacting as strategic substitutes when one policy maker's expansionary
(contractionary) policies are countered by another policy maker's contractionary
(expansionary) policies. For example: if the fiscal authority raises taxes or cuts
spending, then the monetary authority reacts to it by lowering the policy rates and vice
versa. If they behave as strategic complements, then an expansionary (contractionary)
policy of one authority is met by expansionary (contractionary) policies of the other.
The issue of interaction and the policies being complements or substitutes for each other
arises only when the authorities are independent of each other. But when the goals of
one authority are made subservient to those of the other, then one authority solely
dominates the policy making and no interaction worthy of analysis would arise. Also,
fiscal and monetary policies interact only to the extent of influencing the final objective.
So long as the objectives of one policy are not influenced by the other, there is no direct
interaction between them.

5. MEANING OF ECONOMIC GROWTH
Economic growth refers to a steady , continuous ,
uninterrupted , substantial and sustained growth in
the level of income output and employment over a
long period of time in an economy .
TOP 10 ECONOMIES OF THE WORLD

6. FACTORS DETERMINING ECONOMIC GROWTH
The process of economic growth is a very complex one . It is multi-
dimensional in nature . Various economic & non economic factors ,
domestic & outside forces , direct & indirect factors determine the nature
and pattern of economic progress of a country .
Thus the factors determining economic factors are as follows :
 Economic factors
 Non economic factors
 International factors

7. ECONOMIC FACTORS
Economic factors are those factors , which have economic content in
them . They directly determine the nature and extent of economic
development of a country . The growth performance of an economy is
directly associated with them .
 Natural resources
 Capital formation
 Dynamic entrepreneurship
 Capital output ratio
 Technical progress
 Division of labor
 Economic stability
 Balanced growth
 Population
 Structural changes
 Size of the market
 Domestic base

8. NATURAL RESOURCES
Natural resources are described as free gifts of nature .
The nature bestows them to a country .Countries with
abundant natural resources can develop its economy
much faster when compared to a country that is deficient
in natural resources . Efficient utilization of the available
resources is necessary to achieve optimum output which
results in greater rate of productivity .
CAPITAL FORMATION
Capital is the life life-blood of all economic activities .
Here the term ‘capital’ refers to capital goods .
Capital formation is the process of measuring the
increase in the real capital stock of a country during an accounting period

9. It is closely associated with the productive capacity of an economy .
Higher rate of capital formation results in rapid economic development .
Thus savings must be mobilized , converted into investment and created
as capital assets in an economy .
DYNAMIC ENTREPRENEURSHIP
Entrepreneurship plays a very important role in the
Economic development of a country .
An entrepreneur is a person who sets up a business
taking on financial risks in the hope of earning profit .
He looks for ideas and puts them into effect in forecasting economic
growth . He acts as a trigger head to give spark to economic activities by
his entrepreneurial decisions . The major roles played by an entrepreneur
in the economic growth of a country are capital formation , employment
generation , increase in GNP and per capita income , promotes country’s
exports , creation of wealth & distribution etc.,

10. CAPITAL OUTPUT RATIO
Capital output ratio (COR) refers to the number of units of capital
required to produce one unit of output .
For instance , if COR is 4:1 , it implies that 4 units
of capital are required to produce one unit of output .
Generally , lower the COR , higher the productive capacity of capital and
vice-versa . Every economy attempts to produce larger quantity of output
with lower amount of investment .
Hence , all kinds of measures are taken to reduce COR to its minimum
level .
Thus , it plays a very important role in determining the rate of economic
growth.
TECHNOLOGICAL PROGRESS
Technology refers to the application of scientific
Knowledge into practical life in the form of new
tools and implements .

11. Technological progress refers to change in the process & methods of production
thus improvements in techniques of production .
It is a major instrument to raise the productive capacity of an economy .
It increases the ability to make efficient utilization of different resources to
increase production . It helps in avoiding all kinds of wastage . It saves time . It
is cost controller by nature . Thus , it has a decisive role in shaping the pattern
of economic growth of a country .
DIVISION OF LABOR
Division of labor is the specialization of cooperating individuals who perform
specific tasks and roles . It is based on the principle right job for the right man .
It helps in organizing the work in a better manner and secure better results . It
leads to large-scale production and industrial development which accelerate the
rate of growth . It leads to large-scale production and industrial development ,
which accelerates the rate of growth . Thus an economy can reap the benefits of
both internal and external economies of scale .

12. ECONOMIC STABILITY
Economic stability refers to an absence of fluctuations in the economy .
An economy with fairly constant output growth and low or stable
inflation would be considered as economically stable .
An economy with frequent large recessions , very high
or variable inflation or frequent financial crisis would
be considered as economically unstable .
Economic stability does not mean rigidity in activities . 100% economic
stability is neither possible nor desirable . Thus there must be a
reasonable degree of changes in the economy .
However , the general level of economic activities should not be allowed
to fluctuate beyond certain minimum limit .
BALANCED GROWTH
Balanced economic growth refers to proper balance between the various
economic variables such as aggregate savings , investments , income ,
expenditure , demand , supply and different economic policies of the
government etc., in an economy .

13. Similarly , there must be proper integration
between domestic as well as external activities .
it maintains the tempo of economic progress .
Thus it is a major requirement for the smooth
Working of an economy and accelerating the
pace of economic growth in an economy .
POPULATION
Population is generally regarded as an asset
of a nation .
It should never become a liability or burden
to an economy . It serves as both means an end
i.e., they act as means of production and as
consumers they become the end of production .
People are not only producers of wealth but they are also consumers of
wealth . Thus the available human Resource must be exploited efficiently
.

14. STRUCTURAL CHANGES
Structural changes imply improvements in labor productivity and
mobility , managerial ability , higher rate of capital formation production
pattern of goods , quality of goods , composition & size of markets ,
banking & credit institutions , money market & capital market , private
& public sector , JSC’s , MNC’s , etc.,
The process of growth depends on the structure of an economy .
Unless these fundamental changes are brought , development process
cannot be accelerated .
But It is a highly challenging task for an economy .

15. SIZE OF MARKET
Growing and expanding markets reflect higher investment , large-scale
production , higher income and employment in a country .
Growth of market depends upon various factors such as demand for
goods & services , availability of capital , technology , division of labor ,
free movement of goods and services , dynamic entrepreneurs and all
kinds of positive support from the government in the form of monetary
and fiscal incentives etc.
STRONG DOMESTIC BASE
Development depends on a strong domestic or indigenous base .
If the foundation or infrastructure of the economy is strong , it is possible
to erect or construct a solid super structure . Economic development
cannot be simply implanted from outside . External assistance and
support may help to stimulate and facilitate the national process of
growth but they cannot be a substitute for internal initiative , motivation
and national forces for development . If the process is to become
cumulative , sustainable and long lasting , the development forces must
be fundamentally based within the developing economy .

16. NON ECONOMIC FACTORS
Non economic factors are those factors , which do not have economic
content in them . They indirectly determine the nature and extent of
economic development of a country . The growth performance of an
economy is indirectly associated with them .
 Political factors
 Social factors
 Social justice
 Education
 Desire for development

17. POLITICAL FACTORS
Rapid economic development requires a good , strong , stable and
development oriented government . The fundamental requirement is that
there should be a government that works for the betterment of the people.
Political factors includes good & efficient administration , maintenance
of law & order and quality of leadership . Thus politics and economics
are inseparable .
SOCIAL FACTORS
Social factors consist of social structure , organizations and institutions
like the joint family system , caste system , kinship , race division etc.,
Apart from this , it comprises social attitudes , habits , practices , beliefs ,
ceremonies and values of life of the people .

18. SOCIAL JUSTICE
It implies that all people irrespective of the class , group , caste ,
community , clan , religion , region , language they should get equal
opportunity in social life , economic and social advancement .
EDUCATION
Knowledge is described as power .
Education leads to enlightenment and
opens the to acquire knowledge . It makes
them to realize their responsibility .
It creates desire for development . It is the
only way to widen the thoughts of public
for accepting new methods and techniques .
Thus education has been recognized as one
of the vital determinants of economic development and growth .

19. DESIRE FOR DEVELOPMENT
Development is a state of mind . People have to develop the idea of
development before they develop the economy . They should think that if
they put efforts , it is possible to achieve progress . Development is
possible only when people want it and work for it . This psychological
feeling will prepare their minds to make any sort of sacrifice and to pay
any price for it .
Thus , it is regarded as one of the primary requirements for economic
development and growth .

20. INTERNATIONAL FACTORS
Economic growth of a country mainly depends upon a strong domestic
base , favorable psychological environment and internal factors .
At times domestic efforts are to be supported by external factors if the
process of development has to become sustained one . The following are
some of the external or international factors :
 Foreign capital
 Foreign trade
 International co-operation

21. FOREIGN CAPITAL
Flows of capital from one nation to another in
exchange for significant ownership stakes in
domestic companies or other domestic assets
is known as foreign capital .
Scarcity of domestic capital is to be supplemented by foreign capital .
Foreign capital should be utilized to increase the productive power of the
economy . A country should not reserve itself from importing foreign
capital from any corner of the world .
Thus shortage of domestic capital is a major obstacle to economic
growth.
FOREIGN TRADE
Foreign trade is exchange of goods and services across international
borders or territories . To have a favorable foreign trade the imports must
not exceed the exports . Thus , the nature , composition , direction , value
and volume of foreign trade are important factors determining the
economic growth of a country .

22. INTERNATIONAL CO-OPERATION
International co-operation means the interaction of persons or groups of
persons representing various nations in the pursuit of a common goal or
interest.
Both developed and developing nations should come closer and
understand each other’s problems in the right spirit and arrive at most
realistic conclusions to solve them .
There are several international
institutions like World Bank ,
IMF , WTO , IFC , IDA , ADB
and regional economic organizations
like OPEC , ECC , EU , SAARC ,
OECD etc., to assist all the countries
and to protect their interests .
Thus , friendly , cordial and harmonious relationship between different
nations will help in maintaining a sustained and continuous economic
growth of both poor and rich nations .

23. PROBLEMS OF ECONOMIC GROWTH
Many factors and forces determine he nature and speed of economic
growth . There is wide gap between the desire for growth and the actual
growth rates . The actual growth rate lags behind the expected growth
rate in spite of higher expectations .There are many problems and
constraints which hinders economic growth .
The following are the major obstacles to economic growth :
 Economic factors
 Non economic factors
 International obstacles

24. ECONOMIC FATORS
The economic factors which are major hindrance to economic growth are
as follows :
 Vicious circle of poverty
 Shortage of capital
 Population growth
 Difficulty in adopting western technology
 Lack of adequate training facility
 Lack of innovation and dynamic entrepreneurship
 Agricultural constraints
 Human resource constraints
 Adverse balance of payments
 Lack of infrastructure facilities

25. VISCOUS CIRCLE OF POVERTY
Poverty-stricken individuals experience
disadvantages as a result of their poverty, which
in turn increases their poverty. This would mean
that the poor remain poor throughout their lives.
Many developing countries are caught up in
vicious cycle of poverty. Low level of income prevents savings, retards
capital growth, hinders productivity growth, and keeps income low.
Successful development may require taking steps to break up the chain at
many points.
Other points in poverty are also self- reinforcing. Poverty is accompanied
by low levels of education, literacy and skill; these in turn prevent the
adaptation to new and improved technologies and lead to rapid
population growth.
Overcoming the barriers of poverty often
requires a concentrated effort on many
fronts and a 'big-push' is required to break the 'vicious cycle' into
'virtuous circle'.

26. SHORTAGE OF CAPITAL
shortage of capital is one of the most important
problems of economic development and growth .
the vicious circle of poverty has resulted in low
level of income . This in turn has lead to low level
of savings , capital formation , investment ,
production , income and employment .
Capital deficiency is mainly responsible for low
productivity , use of outmoded techniques in both
agriculture & industry and under utilization of all kinds of resources .
A country may possess natural and human resources in abundant . But
resources by themselves are idle which has to be activated , to do this
capital is required . Hence , a higher rate of capital formation is
necessary for rapid economic development and growth .

27. POPULATION GROWTH
Population growth is the increase in the number of
individuals in a population. The population growth
rate is the rate at which the number of individuals
in a population increases in a given time period as
a fraction of the initial population.
Developing countries experience the negative impact of rapid,
uncontrolled population growth often requiring western countries to
provide direct aid to avert famine. Poor social conditions, including
regional warfare and weak governance, often make conditions worse
when scarce resources are not sufficient to meet the needs of a rapidly
growing population. These conditions exacerbate poverty, malnutrition,
childhood and maternal mortality, use of child labor and already
inadequate educational opportunities, especially for women.
Thus Over population is the route cause for all kinds of economic
problems .

28. WESTERN TECHNOLOGY
Modern technology of the west is not suitable for the developing
countries on account of acute shortage of capital , skilled labor and
scientific management . They are struggling hard to evolve a new
suitable modern technology for them . Expenditure on R&D and
improvements in science and technology is pitifully low in these nations.
Lack of innovative spirit is another problem in these nations .
LACK OF TRAINING FACILITY
Efficiency , productivity , skill formation , technical knowledge etc.,
depends upon availability of training facility and higher education .
Lack of them is the main obstacle to raise the productive power of the
economy . Hence , there is low output and income .
LACK DYNAMIC ENTREPRENEURSHIP
Entrepreneurship is largely absent in developing countries due to absence
of favorable economic and socio-cultural climate . There is terrible
shortage of highly developed highly standardized business schools , job
oriented schools , training centers etc., in these nations .

29. AGRICULTURAL CONSTRAINTS
Majority of the developing nations have pre-
dominantly agricultural economies . Agricultural
production constitutes a large share of their
national income and agricultural commodities from a considerable part
of the values of their exports . But the agricultural practices the
techniques and methods used in the cultivation , the size of holdings is
small and productivity is miserably low .
HUMAN RESOURCE CONSTRAINTS
The developing countries lack people possessing critical skills and
knowledge required for all round development of the economy . Low
labor productivity and factor immobility are mainly the result of poor
quality of human resource . Machines break down often wear and tear
out soon . Materials components are wasted and the quality of production
falls and cost rises . In such countries there is general resistance to
change .

30. ADVERSE BALANCE OF PAYMENTS
Adverse BOP is another major problem in these countries . As their
development requirements are huge , they are importing all kinds of
inputs , capital , technology , finished goods to build up their foundation
of the economy . On the other hand , the export-promotion policies of
these countries have not yet yielded substantial results to reduce the
amount of deficits in their BOP .
LACK OF INFRASTRUCTURE FACILITIES
The process of development depends
on the availability of various kinds of
infrastructure facilities , development of
transport and communication systems ,
generation of electricity , power , fuel etc., in the absence of such
facilities , development cannot take place .

31. NON ECONOMIC FACTORS
The non economic factors which are major hindrance to economic
growth are as follows :
 Socio-Cultural constraints
 Lack of education
 Political instability

32. SOCIO-CULTURAL CONSTRAINTS
The existing social structure , social institutions etc., are non conductive
to economic growth . The caste system , joint family system , social
customs etc., have arrested economic progress and continued to hamper
development . The oriental religion gives less inducement to the work ,
thrift and hard work . Progressive outlook , zeal for development ,
aptitude for growth , desire to come up in life etc., are totally absent in
these countries . Instead , there is resistance to change . People have
developed a philosophy of resignation . Hence , a sort of socio-cultural
revolution is required to bring about total transformation in these nations.
LACK OF EDUCATION
Conservative outlook , superstitious beliefs ,
fatalism , ignorance , illiteracy , rigid sentiments ,
unscientific analysis , irrational behavior etc., are the direct result of
absence of education . Popular education and enlightenment can do a lot
in changing the mental setup of the people .

33. POLITICAL INSTABILITY
The political setup and environment is not congenial for growth in most
of these nations . Existence of a corrupt and inefficient government
encourages favoritism , nepotism , bribery etc.,
Dishonesty , lack of interest , sincerity in administration and lack of
political stability fails to create an atmosphere of confidence in the minds
of the people .

34. INTERNATIONAL OBSTACLES
Many UDC’s have remained backward on account of the operation of some
unfavorable international factors , they are as follows :
 Foreign trade orientation has not contributed much to the overall
development of these economies . On the contrary , it has lead to the
development of export sector and utter neglect of other sectors of the
economy .
 Dependence on exports too much exposes an economy to the fluctuating
world market , demand and prices .
 Imports of finished industrial products from developed countries obstructed
the growth of industries in UDC’s .
 There has been a continuous decline in terms of trade of poor nations .
Hence , there is need for regulation and re-orientation of foreign trade in
order to stimulate economic development in UDC’s .
 The flow of foreign capital and technology and other kinds of skills is not
smooth . Developed nations are imposing conditions which slows down the
progress of these nations .
 The international organizations like IMF , WTO etc., have not assisted these
nations to develop their respective economics at a faster rate .