Economic growth is the difference between actual income and potential income in any economy. Economic growth is a complex concept with many interrelated factors. Some of these factors are time and productivity, price level changes, consumer expenditure, government consumption and capital gains.
Economic growth is generally defined as the improvement in the general performance of an economy over a period of time. Statistically, economic growth is defined as the percentage increase in real Gross Domestic Product, or nominal GDP. Nominal GDP is determined by a basket of economic indicators such as output, employment and prices. These indicators take into account a wide range of indicators. The basket also takes into account the policies of government at both national and state levels and changes in tax structures over time. Many economic theories are used to describe the process of economic growth.
One important factor that drives economic growth is the extent of inputs available to produce goods and services. The other important factor is the ability of the business to process raw materials and make capital goods. A key concept in determining the elasticity of capital assets and output is the concept of capital income or profit, which is essentially the difference between total income and the value of the output that could be produced with existing resources.
Another major factor that drives economic growth is technology. The pace of technological change is usually dictated by the overall rate of progress, which is affected by economic growth, access to technology and infrastructure and perception of future demand for particular economic goods and services. In the United States, technological change is a major force in narrowing the gap between economic growth and employment growth. At the same time, technological change has been stalling in some other advanced economies, resulting in persistent unemployment rates.
Higher economic growth leads to enhanced income and tax revenues. One way to increase tax revenues is to reduce public consumption. Lower consumption of public services implies a lower level of taxation of gross domestic product (GDP). One of the factors that determine the level of taxation of GDP is the extent of public debt relative to the level of output and income created by the economy. A higher level of public debt typically means higher taxes because of higher levels of government borrowing and lending.
Government borrowing and lending create two major channels through which the public purse is expended. Private borrowing and lending create three major channels through which public funds are spent: directly by individuals and households for economic growth and maintenance; by governmental agencies and institutions for the purpose of meeting their obligations and costs; . . . . . . and by financial institutions for the purpose of generating higher returns on publicly traded assets. Direct spending by households and other individuals creates a positive effect on the economy through direct savings of money that results in higher economic growth. However, increased government borrowing and lending create two negative channels through which reduced government borrowing and lending creates lower levels of economic growth. The reduction in government borrowing and lending lowers government spending and the corresponding reduction in gross national debt result in a decrease in the national income and consequently, reduced tax revenues.