Economic growth is when groups of people, called economic actors, are able to produce goods and services more efficiently. This can happen when they have better tools (capital goods) and greater specialization of laborers. It can also happen when they use their existing resources, or inputs, more efficiently. For example, if a worker previously could produce one book in months but then he or she developed a new production technology that allowed a single person to create several books in the same amount of time, this is an instance of economic growth. This type of economic growth is also known as increasing productivity.
There are different kinds of economic growth: capital productivity, labor productivity, and material productivity. In general, these types of growth are measured by looking at how much an economy is able to produce per unit of resource used (i.e., the real GDP per capita).
It’s important to understand what economic growth is because it affects people’s lives. For example, if a country’s economic growth is slowing or even stalling, it means that people aren’t earning as much and will have a harder time buying the things they need. It can also mean higher unemployment rates, less money available to pay for goods and services, and environmental costs such as pollution.
It’s hard to know what the best way is to encourage economic growth. But economists have done extensive research on the subject, and there are some broadly agreed-upon results. Among them, incentives are vital: individuals must have a reason to save, invest, go to school, or start a business, for example. Moreover, the rules of an economy must be designed to encourage such behavior, including the creation of well-designed institutions.
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