Economic growth is the expansion of a country’s ability to produce more goods and services. The resulting increase in total market value is measured by aggregate measures of output including gross domestic product (GDP). An economy can experience economic growth by increasing the amount of capital or labor it has or by better using those resources.
More Capital
The most obvious way for a nation to experience economic growth is by adding more physical capital, such as factories, equipment and machinery. Capital increases a country’s productivity by allowing people to work more efficiently and quickly. An example of this is the invention of the automobile, which allowed people to travel more quickly and easily than ever before.
More Labor
An increase in a country’s population can also spur economic growth by giving more people the ability to produce more goods and services. But this type of growth can have limits. Adding more workers to the workforce requires more money to pay them, which can reduce the overall economy’s productivity by taking money away from other activities.
More Value
Economic growth can also occur when a country’s products see an increase in demand. This is sometimes a result of higher prices for raw materials, but can also be caused by events outside the economy’s control, such as war or natural disaster. Governments can also attempt to stimulate economic growth by lowering interest rates, making it cheaper for people to borrow money. This can only last so long, however, before rates have to be raised again to combat price inflation.