Economic growth refers to the long-term upward trend in production arising from structural causes like technological progress and factor accumulation. Short-run changes in production can be explained by cyclical causes such as aggregate demand fluctuations.
The most straightforward way to measure economic growth is to add up a country’s GDP, or total market value of all the country’s goods and services. This is what most people think of when they hear the word “economic growth.” But GDP measures only a narrow subset of all economic output. It leaves out many important categories, such as housing, education, and health care. And it doesn’t account for the fact that not all people value the same goods and services. A smartphone is worth more than a pair of socks, for example.
Economic growth can also be measured in terms of labor productivity, which is the amount of economic output produced per unit of time. It’s basically how much gets done for one hour of work, or one dollar spent. Labor productivity is important because it enables consumers to buy more products, and so drive growth in overall economy.
Another measurement of economic growth is potential growth, which represents the maximum sustainable rate of economic output. It’s calculated by estimating the growth rate of an economy’s productive capacity, including its labor force and capital investment. Potential growth can fluctuate because of external factors, and is often influenced by interest rates.
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