Economic growth is important to everyone – personal growth in the value of your checking account, portfolio growth, and the growth of the economies of nations. Understanding how economies grow and why some are richer than others is a central topic of academic inquiry, and a top priority for elected officials in advanced and developing countries alike.
Ultimately, there are four key factors that drive economic growth: the availability of natural resources and capital equipment; labor; entrepreneurship; and improved technology. The latter enables the economy to produce more output with the same stock of capital goods, by combining those resources in novel ways that improve productivity (technological progress accounts for about 40 percent of economic growth). The rate of technological change depends on the ability of the economy to save and invest in new capital equipment. The other two sources of economic growth – population and productivity – also depend on savings and investment.
In order for the economy to grow, aggregate demand must increase enough to push outward each country’s production possibilities curve. It is also important for these additional resources to be employed fully and efficiently (productive efficiency) and for the optimal combination of goods to be achieved (allocative efficiency).
GDP is a measure of the total dollar value of all of the goods and services produced in a given period. It is important to remember that while GDP provides a snapshot of the economy’s total output, it doesn’t tell us about how much of this output goes to individuals. For example, a family’s childcare isn’t included in GDP if it’s done by parents, but it would be included if it was hired out to a child care worker.
