Introduction
The contemporary economy is huge and complex, which is why it is difficult for governments and economic institutions to regulate the economy. In addition, as there are several endogenous and exogenous factors that affect it, which makes it difficult to regulate an economy. This also makes difficult, for a government and financial institutions to realize the primary objective of economic growth. For any political-economic-social system, the primary objectives are sustainable economic growth and high employment. A government and its financial intuitions realize these objectives by devising various kinds of economic strategies and economic policies. For instance, to ensure healthy economic growth, a government and its financial institutions, such as a central bank, may adopt expansionary fiscal and monetary policies. These policies/strategies have several components, which a government and its institution (such as central bank) may emphasize collectively or in isolation. There are other factors, such as monetary policy and trade policies, that affect economic growth, directly and indirectly (Intelligent Economist, 2018).
Discussion
We have already asserted how different exogenous and endogenous factors affect economic growth. In this section, we discuss in detail how various variables affect an economy in a long and short run. There are numerous factors, both endogenous and exogenous, which affect an economy. However, we will emphasize on 1) Political Stability, 2) Monetary Policy, Fiscal Policy and 4) Governance.
These are major factors, which directly and indirectly affect any economy, whether developed or developing.
Political Stability
The evidence very strongly suggests that for sustainable economic growth, political stability is essential. Almost all the studies infer that there is a positive correlation between economic growth and political stability. When political stability starts to deteriorate, the economy also starts to shake, or growth, about the economy, starts to dwindle. The process of dwindling is very gradual, and sometimes it takes years for an economic collapse, because of continuous instability. However, when a country is politically stable, it doesn’t increase the confidence of local investor, but also encourages Foreign Direct Investment to land in that country. Foreign Investors are very sensitive regarding 1) stability and 2) governance. From the scrutiny of largest and most robust economies, we learn that all these economies facilitate by stable political systems. Therefore, political stability is a major factor, which affects an economy (Hussain, 2014).
Monetary Policy
Central Bank, of any country, regulates monetary policy. It is a semi-autonomous financial institution, which determines 1) interest rates and 2) supply of money. A contractionary monetary policy reduces the supply of money by selling securities and increasing interest rates; whereas an expansionary monetary policy increases the supply of money, by decreasing interest rates and buying securities. The increase in money supply increases general inflation in an economy, which acts as an incentive for the private sector. Also, the decreased in interest rates increase investment as an investment is negatively related to interest rates. Economies prefer monetary policy to realize economic objectives (CBN.Gov, 2017).
Fiscal Policy
It also has several components, such as taxes and expenditure. A government can emphasize on its single component, to realize objective, or on all of its components. When a government employs an expansionary fiscal policy, it increases expenditure and gives tax breaks to corporations and ordinary people. Recently, the Trump Administration implemented its tax-plan (emphasis on Expansionary Fiscal Policy), which cuts the corporate tax of around 22% from 36%. Trump Administration suggests that this will 1) reduce the cost of production, 2) increase investment (because this will increase profit) and 3) it will reduce unemployment. All three factors affect economic growth. Fiscal policy is avoided because it yields various kinds of complications. However, during the recession, governments use expansionary fiscal policy to produce employment at large scale, which increases consumption and prices. Consumption is considered an engine of growth; whereas prices act as an incentive for the private sector to invest in the economy (Ang, 2017).
Governance
Governance is closely related to political stability. When political stability prevails for a longer period, institutions develop. These institutions aid governments in implementing its political-economic policy. These institutions also ensure that the economic system is just and firms are implementing corporate ethics. When corporate and economic systems are fair and just, they increase positive work-deviance, at the macro level. It increases the productivity of industries and adds value to a product or service. It makes products and services more competitive in international markets (Ang, 2017).
Trade
Trade policies directly affect the economy in several ways. When a country allows foreign goods and services to local markets, this makes these markets competitive. It increases consumer surplus (real income) and decreases the producer’s surplus (profit). It increases consumption and saving in an economy (because of consumer surplus) and forces firms innovate to remain competitive (improves quality of economy). If consumers prefer foreign goods and services over the local, for a longer period, then the economy if affected badly (balance of payments and de-industrialization) (Hussain, 2014). Following graph shows all major factors that impact economic growth of any country.
Conclusion
In the end, it is concluded that the scrutiny of evidence and literature, about economic growth, we know that there are several factors, which affect the economy and economic growth. In this academic discourse, we have discussed five (5) major factors. We have thoroughly discussed how these factors can affect, positively and negatively, an economy. Some of these factors, such governance, and political stability, very subtly affect a developing and developed economy. However, factors like expansionary monetary and fiscal policy affect directly and in short span of time. Therefore, countries emphasize on monetary and fiscal policies and instruments to bring major changes to an economy. Sometimes, monetary and fiscal strategies and policies can produce results; sometimes they fail to achieve objectives.
References
Ang, Y. Y. (2017, February 11). Which comes first: good governance or economic growth? (Spoiler: it’s neither). Retrieved from http://blogs.worldbank.org/governance/which-comes-first-good-governance-or-economic-growth-spoiler-it-s-neither
CBN.Gov. (2017, December 1). How Does Monetary Policy Affect Economic Growth? Retrieved from https://www.cbn.gov.ng/Out/EduSeries/Series11.pdf
Hussain, Z. (2014, January 6). Can political stability hurt economic growth? Retrieved from http://blogs.worldbank.org/endpovertyinsouthasia/can-political-stability-hurt-economic-growth
Intelligent Economist. (2018, January 1). What Is Economic Growth? Retrieved from https://www.intelligenteconomist.com/economic-growth/
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