When the economy is growing, it’s good news for businesses and individuals alike. If it’s stalled or contracting, companies will have to cut back on investment, and people may not be able to find new jobs—and will likely feel worse off. That’s why economic growth matters to economists and the public-and private-sector leaders who make decisions about how to spend tax dollars and invest resources.
But there’s more to economic growth than the arithmetic. For example, GDP and other economic measures only take into account the amount of money that is being spent in a country—not the quality of that spending, which is important because some goods and services are more valuable to some individuals than others (e.g., a heater is more valuable to someone living in Alaska than it is to someone living in Florida). The fact that the value of an item can vary widely makes measuring the quantity of money being spent very challenging.
There are a few main ways to produce economic growth. One way is to increase the number of workers who generate economic goods and services. This can be done, for example, by bringing in immigrants or creating more workplace opportunities. The downside is that the additional labor force must consume enough to sustain itself, so there’s a limit to how fast this can be done without creating inflationary pressures.
Another way to achieve economic growth is through technological progress. For instance, the goldsmith Johannes Gutenberg invented a printing press in the 15th century, and this dramatically accelerated book production in Europe. However, this is not as effective as generating more labor force or capital equipment. This is because there’s a point at which annual investment in capital will equal annual depreciation.