What Are Ways Economic Growth Can Be Achieved? (2024)

Economic growth is measured by an increase in gross domestic product(GDP), which is defined as the combined value of all goods and services produced within a country in a year. Many forces contribute to economic growth. However, there is no single factor that consistently spurs the perfect or ideal amount of growth needed for an economy. Unfortunately, recessions are a fact of life and can be caused by external factors such as geopolitical and geofinancial events.

In the United States, economic growth often is driven by consumer spending and business investment. If consumers are buying homes, for example, home builders, contractors, and construction workers will experience economic growth. Businesses also drive the economy when they hire workers, raise wages, and invest in growing their businesses. A company that buys a new manufacturing plant or invests in new technologies creates jobs and spending, which leads to growth in the economy.

Other factors help promote consumer and business spending and prosperity. Banks, for example, lend money to companies and consumers. As businesses have access to credit, they might finance a new production facility, buy a new fleet of trucks, or start a new product line or service. The spending and business investments, in turn, have positive effects on the companies involved. However, the growth also extends to those doing business with the companies, including in the above example, the bank employees and the truck manufacturer.

Tax Cuts and Tax Rebates

Tax cuts and tax rebates are designed to put more money back into the pockets of consumers. Ideally, these consumers spend a portion of that money at various businesses, which increases the businesses' revenues, cash flows, and profits. Having more cash means companies have the resources to procure capital, improve technology, grow, and expand. All of these actions increase productivity, which grows the economy. Tax cuts and rebates, proponents argue, allow consumers to stimulate the economy themselves by imbuing it with more money.

As with any stimulus used to spur economic growth, it's often difficult to pinpoint how much growth was created by the stimulus and how much was generated by other factors and market forces.

Stimulating the Economy With Deregulation

Deregulation is the relaxing of rules and regulations imposed on an industry or business. It became a centerpiece of economics in the United States under the Reagan administration in the 1980s, when the federal government deregulated several industries, most notably financial institutions. Many economists credit Reagan's deregulation with the robust economic growth that characterized the U.S. during most of the 1980s and 1990s.

Proponents of deregulation argue tight regulations constrain businesses and prevent them from growing and operating to their full capabilities. This, in turn, slows production and hiring, which inhibits GDP growth. However, economists who favor regulations blame deregulation and a lack of government oversight for the numerous economic bubbles that expanded and subsequently burst during the 1990s and early 2000s.

Many economists cite that there was a lack of regulatory oversight leading up to the financial crisis of 2008. Subprime mortgages, which are high-risk mortgages to borrowers with less-than-perfect credit, began to default in 2007. The mortgage industry collapsed, leading to a recession and subsequent bailouts of several banks by the U.S. government. New regulations were implemented in the years to follow that imposed increased capital requirements for banks, meaning they need more cash on hand to cover potential losses from bad loans.

Using Infrastructure to Spur Economic Growth

Infrastructure spending occurs when a local, state, or federal government spends money to build or repair the physical structures and facilities needed for commerce and society as a whole to thrive. Infrastructure includes roads, bridges, ports, and sewer systems. Economists who favor infrastructure spending as an economic catalyst argue that having top-notch infrastructure increases productivity by enabling businesses to operate as efficiently as possible. For example, when roads and bridges are abundant and in working order, trucks spend less time sitting in traffic,and they don't have to take circuitous routes to traverse waterways.

Additionally, infrastructure spending creates jobs as workers must be hired to complete the green-lighted projects. It is also capable of spawning new economic growth. For example, the construction of a new highway might lead to other investments such as gas stations and retail stores opening to cater to motorists.

The Bottom Line

Multiple factors working together typically are what impact economic growth, which often is reflected in GDP growth and GNP growth. There are numerous strategies governments might use to try and stimulate economic growth, such as tax breaks or tax rebates, deregulation, and investment in infrastructure.