Economic Growth Definition - Investopedia

Economic growth is an increase in the production of economic goods and services, compared from one period of time to another. It can be measured in nominal ... Economics Macroeconomics WhatIsEconomicGrowth? Economicgrowthisanincreaseintheproductionofeconomicgoodsandservices,comparedfromoneperiodoftimetoanother.Itcanbemeasuredinnominalorreal(adjustedforinflation)terms.Traditionally,aggregateeconomicgrowthismeasuredintermsofgrossnationalproduct(GNP) orgrossdomesticproduct(GDP),althoughalternativemetricsaresometimesused. KeyTakeaways Economicgrowthisanincreaseintheproductionofgoodsandservicesinaneconomy.Increasesincapitalgoods,laborforce,technology,andhumancapitalcanallcontributetoeconomicgrowth.Economicgrowthiscommonlymeasuredintermsoftheincreaseinaggregatedmarketvalueofadditionalgoodsandservicesproduced,usingestimatessuchasGDP. 1:57 EconomicGrowth UnderstandingEconomicGrowth Insimplestterms,economicgrowthreferstoanincreaseinaggregateproductioninaneconomy.Often,butnotnecessarily,aggregategainsinproductioncorrelatewithincreasedaveragemarginalproductivity.Thatleadstoanincreaseinincomes,inspiringconsumerstoopenuptheirwalletsandbuymore,whichmeansahighermaterialqualityoflifeorstandardofliving. Ineconomics,growthiscommonlymodeledasafunctionofphysicalcapital,humancapital,laborforce,andtechnology.Simplyput,increasingthequantityorqualityoftheworkingagepopulation,thetoolsthattheyhavetoworkwith,andtherecipesthattheyhaveavailabletocombinelabor,capital,andrawmaterials,willleadtoincreasedeconomicoutput. ImagebySabrinaJiang©Investopedia 2020 Thereareafewwaystogenerateeconomicgrowth.Thefirstisanincreaseintheamountofphysicalcapitalgoodsintheeconomy.Addingcapitaltotheeconomytendstoincreaseproductivityoflabor.Newer,better,andmoretoolsmeanthatworkerscanproducemoreoutputpertimeperiod.Forasimpleexample,afishermanwithanetwillcatchmorefishperhourthanafishermanwithapointystick.Howevertwothingsarecriticaltothisprocess.Someoneintheeconomymustfirstengageinsomeformofsaving(sacrificingtheircurrentconsumption)inordertofreeuptheresourcestocreatethenewcapital,andthenewcapitalmustbetherighttype,intherightplace,attherighttimeforworkerstoactuallyuseitproductively. Asecondmethodofproducingeconomicgrowthistechnologicalimprovement.Anexampleofthisistheinventionofgasolinefuel;priortothediscoveryoftheenergy-generatingpowerofgasoline,theeconomicvalueofpetroleumwasrelativelylow.Theuseofgasolinebecameabetterandmoreproductivemethodoftransportinggoodsinprocessanddistributingfinalgoodsmoreefficiently.Improvedtechnologyallowsworkerstoproducemoreoutputwiththesamestockofcapitalgoods,bycombiningtheminnovelwaysthataremoreproductive.Likecapitalgrowth,therateoftechnicalgrowthishighlydependentontherateofsavingsandinvestment,sincesavingsandinvestmentarenecessarytoengageinresearchanddevelopment. Anotherwaytogenerateeconomicgrowthistogrowthelaborforce.Allelseequal,moreworkersgeneratemoreeconomicgoodsandservices.Duringthe19thcentury,aportionoftherobustU.S.economicgrowthwasduetoahighinfluxofcheap,productiveimmigrantlabor.Likecapitaldrivengrowthhowever,therearesomekeyconditionstothisprocess.Increasingthelaborforcealsonecessarilyincreasestheamountofoutputthatmustbeconsumedinordertoprovideforthebasicsubsistenceofthenewworkers,sothenewworkersneedtobeatleastproductiveenoughtooffsetthisandnotbenetconsumers.Alsojustlikeadditionstocapital,itisimportantfortherighttypeofworkerstoflowtotherightjobsintherightplacesincombinationwiththerighttypesofcomplementarycapitalgoodsinordertorealizetheirproductivepotential. Thelastmethodisincreasesinhumancapital.Thismeanslaborersbecomemoreskilledattheircrafts,raisingtheirproductivitythroughskillstraining,trialanderror,orsimplymorepractice.Savings,investment,andspecializationarethemostconsistentandeasilycontrolledmethods.Humancapitalinthiscontextcanalsorefertosocialandinstitutionalcapital;behavioraltendenciestowardhighersocialtrustandreciprocityandpoliticaloreconomicinnovationslikeimprovedprotectionsforpropertyrightsareineffecttypesofhumancapitalthatcanincreasetheproductivityoftheeconomy. MeasuredinDollars,NotGoodsandServices Agrowingormoreproductiveeconomymakesmoregoodsandprovidesmoreservicesthanbefore.However,somegoodsandservicesareconsideredmorevaluablethanothers.Forexample,asmartphoneisconsideredmorevaluablethanapairofsocks.Growthhastobemeasuredinthevalueofgoodsandservices,notonlythequantity. Anotherproblemisnotallindividualsplacethesamevalueonthesamegoodsandservices.AheaterismorevaluabletoaresidentofAlaska,whileanairconditionerismorevaluabletoaresidentofFlorida.Somepeoplevaluesteakmorethanfish,andviceversa.Becausevalueissubjective,measuringforallindividualsisverytricky. Thecommonapproximationistousethecurrentmarketvalue.IntheUnitedStates,thisismeasuredintermsofU.S.dollarsandaddedalltogethertoproduceaggregatemeasuresofoutputincludingGrossDomesticProduct. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedTerms GrossDomesticProduct(GDP)Definition Grossdomesticproduct(GDP)isthemonetaryvalueofallfinishedgoodsandservicesmadewithinacountryduringaspecificperiod. more LaborProductivityDefinition Laborproductivityisatermfortheoutputoflaborperhour. more ReadingIntoHumanCapital Humancapitalisanintangibleassetorqualitynotlistedonacompany'sbalancesheet.Itcanbeclassifiedastheeconomicvalueofaworker'sexperienceandskills. more WhatAreFactorsofProduction? Factorsofproductionaretheinputsneededforthecreationofagoodorservice,theseincludelabor,entrepreneurship,andcapital. more WhatIstheLawofSupply? Theeconomiclawofsupplystatesthatasthepriceofagoodorserviceincreases,thequantityofgoodsorservicesincreasesandviceversa. more WhatIstheOne-ThirdRule? Theone-thirdruleisaruleofthumbthatestimatesthechangeinlaborproductivitybasedonchangesincapitalperhouroflabor. more PartnerLinks RelatedArticles Economics WhatAretheBestMeasurementsofEconomicGrowth? 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