Understanding Economic Growth

What is ‘Economic Growth’

Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. It can be measured in nominal or real terms, the latter of which is adjusted for inflation. Traditionally, aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes used.

BREAKING DOWN ‘Economic Growth’

In simplest terms, economic growth refers to an increase in aggregate productivity. Often, but not necessarily, aggregate gains in productivity correlate with increased average marginal productivity. This means the average laborer in a given economy becomes, on average, more productive. It is also possible to achieve aggregate economic growth without an increased average marginal productivity through extra immigration or higher birth rates.

Causes of Economic Growth

There are only a few ways to generate economic growth. The first is a discovery of new or better economic resources. An example of this is the discovery of gasoline fuel; prior to the discovery of the energy-generating power of gasoline, the economic value of petroleum was relatively low. Gasoline became a “better” and more productive economic resource after this discovery.

Another way to generate economic growth is to grow the labor force. All else equal, more workers generate more economic goods and services. During the 19th century, a portion of the robust U.S. economic growth was due to a high influx of cheap, productive immigrant labor.

A third way to generate economic growth is to create superior technology or other capital goods. The rate of technical growth and capital growth is highly dependent on the rate of savings and investment, since savings and investment are necessary to engage in research and development.

The last method is increased specialization. This means laborers become more skilled at their crafts, raising their productivity through trial and error or simply more practice. Savings, investment and specialization are the most consistent and easily controlled methods.

 

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