Economic growth is the increase in the total amount of finished goods and services produced in an economy over time. It’s usually measured as gross domestic product (or GDP) per capita, which adjusts the measure for population size and makes it easier to compare economies.
Economic output can grow through a variety of means. One common way is through increased investment in capital equipment, which allows workers to produce more of the same goods and services with the same amount of labor over a period of time. Examples of investments in capital equipment include building new factories and buying more computers. Another way economic output can grow is through technological innovation, which creates new goods and services that are more valuable than the old ones. Improvements in technology can be as small as a better fish hook or as large as the invention of a more efficient airplane engine.
An economic growth rate is often quoted as an annual percentage, such as 3 percent. This calculation is based on the principle of compounding, which states that adding an amount to an existing amount produces a larger result. So, for example, if the economy grows by 3 percent in a year, then it will be 6 percent larger the following year and so on.
But the actual pace of economic growth is influenced by many factors. For instance, short-term policies like monetary and fiscal measures can influence actual growth, but they can also cause a recession by depressing consumer demand. And long-term policy measures, such as investments in education, infrastructure and research and development, can help boost potential growth rates.
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