Economic growth is the increase in the production of goods and services, measured using estimates such as gross domestic product (GDP). This increases incomes, inspiring consumers to spend more, driving a rising material standard of living and overall quality of life. Economic growth is vital to countries of all sizes. It’s why economists study it and why policy makers are always striving to achieve it.
The growth rate varies by country and is influenced by a multitude of factors. For example, the incentives that encourage people to save or invest differ across nations. The cost of resources, such as the price of oil or gold, are also a factor in how quickly an economy can grow. But, a nation’s leaders can design its institutions in ways that maximize its economic growth potential.
Increasing the quantity of physical capital in an economy, such as by adding new buildings or machinery, can speed up economic growth. However, achieving sustained economic growth depends more on the growth of human and technological capital. The more knowledge workers have, the more productive they can be. For example, a computer built today may require the same amount of physical materials as one from 10 years ago but a computer with faster processing power produces more output per hour of labor than the previous model.
The most important driver of growth is increased productivity, or output per hour worked. The best way to stimulate this growth is to reduce barriers to technology adoption, such as by improving the skills of laborers and increasing the quality of tools they use.