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What Are the Different Ways to Increase Economic Growth?

By Mark Wollacott
Updated May 16, 2024
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National governments control the majority of tools used to increase economic growth. These often come in the form of small changes to taxation levels, regulations and government projects or as part of a larger set of actions known as a stimulus package. A single individual or company rarely has the ability to affect a whole economy, but actions by a group of businesses such as retailers or banks can have an impact on growth. Levers that can be applied to an economy include taxation, money supply, quality control and adjusting the overall business climate.

Taxation determines the amount of revenue that a government gets from the activities of its citizens or subjects. Increased taxation does not automatically decrease economic growth, but it can curtail the activity that is being taxed. The reduction of taxes is a hot topic whenever economies fall into recession.

Targeted tax cuts such as to capital gains tax, business tax and consumption taxes can have a positive effect and increase economic growth. Lower business taxes allow companies either to post great profits or to invest in hiring new staff members. Cuts to consumption taxes or the income taxes of the poor create economic growth through the increase in consumption. Some economists believe that reducing the taxes of the wealthy in society also increases economic growth because the wealthy reinvest their savings by employing new staff members and creating new businesses.

A substantial portion of economic growth is driven not by big business, but by small and medium-sized businesses. Small businesses tend not to have the same liquidity and cash reserves of larger corporations. Governments and banks can increase economic growth by ensuring that these firms have access to funding. Policies such as quantitative easing, business assistance and tax exemptions are policies that help fund and promote small to medium businesses.

According to economist Joseph Schumpeter, new technology and innovation destroy old markets and create new ones. Fostering innovative individuals and companies, therefore, breeds an environment that is ripe for economic growth. The production of products and services, and the selling of them, are core drivers of growth in developed economies. Manufacturing and other businesses, therefore, require the right circumstances to help increase economic growth. These circumstances include free or favorable international trade agreements, good and stable exchange rates, access to funding and fewer or less-complicated regulations.

John Maynard Keynes believed that increasing employment leads to increased consumption, and that this will increase economic growth. Keynes believed that the government should hire new workers to reduce unemployment. His detractors, however, believed that the government should increase the supply of money and allow the free market to hire employees instead. Most modern economists, including Paul Romer, agree that increasing education and training automatically builds a higher-quality workforce, which in turn drives growth.

Economies such as those of the United States and Great Britain derive a large amount of growth from their housing markets. This occurs when buyers and sellers are able to generate profits from houses and other plots of land. Homeowners also are able to tap into the value of the property in times of need. Governments can increase economic growth by taking measures such as regulating mortgage lending, reducing property taxes and adjusting inheritance taxes to keep the property market healthy.

Governments also can take preventative and passive measures to increase economic growth as well as stimulating it. For example, governments can use tax and regulation to limit bad practices, such as debt buying or risky investments, thereby preventing actions that might harm economic growth. They also can choose not to act when a business fails. Artificially preserving businesses held back the Japanese economy in the 1990s, whereas allowing business failures means that only the most successful — and therefore profitable — companies compete.

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Discussion Comments

By bear78 — On Nov 15, 2014

I have a great idea for US economic growth. How about the government refusing to bail out bankrupt businesses and banks for starters?

The government thinks that it's doing the economy a favor by doing this but I don't think that's the case at all. The free market runs on the concept of competition. The best players stay and those that are weak go bankrupt. That's how a country maintains a lively, productive market. Bailing out bankrupt businesses does nothing but waste the federal budget. That money would be more beneficial to the government if it is used for education, technology, etc.

By fify — On Nov 15, 2014

@bluedolphin-- Yes. Economic growth and inflation have an inverse relationship. Meaning that when the economy grows, inflation falls and when inflation increase, the economy slows down.

There are many factors that affect economic growth. So we can't say that the economy will improve with one factor alone. But the best way to reduce inflation is to increase production. When production increases, supply increases. And when supply increases, prices fall and people have greater buying power.

By bluedolphin — On Nov 14, 2014

Can we increase economic growth by reducing inflation? And if so, how do we go about doing that? Is this the easiest way to encourage economic growth?

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