An economy’s growth matters to people—whether they’re saving for a home or a retirement, planning for college or starting a business. They want their incomes to rise and they expect that the goods and services they buy will also increase in value. Economic growth is what allows this to happen.
A common measure of economic growth is the gross domestic product (GDP), or the total market value of all goods and services produced in a country in a given year. But there are many other ways to measure economic growth, including consumption, gross investment, real GDP per capita, and productivity.
Economic growth is a complex subject, and different economies grow at different rates for various reasons. But it’s important to remember that most growth comes from the productivity of labor and the other productive factors—physical and human—that make up the economy.
When new ideas improve how we use existing resources—increasing output per unit of input—this is known as technological progress or long-run economic growth. Think of a computer that can do more work in less time than a computer built 10 years ago, for example. This improved productivity increases the amount of output we can get out of our inputs—and reduces the cost of the inputs themselves.
The fastest rate of economic growth historically came from the combination of growth in the potential output of the economy and improvements in labor productivity. Potential output grows through native population growth and immigration, and through business investment in tangible assets (machines, factories, offices, and stores) and research and development. And improvements in labor productivity come from training and skills development, from trial and error, and from experience.
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