Economic growth enables people to buy more goods and services, and raises their standard of living. The most common measure of economic growth is gross domestic product (GDP), which is the sum of consumer spending, business investment, government spending, and net exports. A growing economy is often a result of economic policies. However, economic policymakers must understand the institutional structure that an economy needs if it is to experience modern economic growth and ongoing increases in standards of living.
Understanding the mechanisms by which an economy grows can help economists predict its performance, particularly in the face of crisis. The success of an economy in producing growth depends on the incentives offered to people and businesses. A well-designed system of institutions can promote the savings, investment, and innovation that produce growth. But a poorly designed institution can stifle these efforts and lead to slower growth.
A key source of economic growth is the increase in labor productivity. More workers means more economic output, and a growing labor force contributes to growth through native population growth and immigration. A growing potential labor force also enables greater investment in tangible capital assets such as machines, stores, and factories, and intangible capital assets like R&D.
Two other major sources of economic growth are the expansion of the available production possibilities and the availability of resources. The former involves the growth of the potential labor force, which is a function of the supply of labor and the demand for labor, as well as the availability of capital to fund investments in productive capacity. The latter depends on full employment of existing resources, which is achieved through both productive efficiency and allocative efficiency.
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