Economic growth is an increase in the level of goods and services produced by an economy. The most common measure of economic growth is real gross domestic product (GDP). The faster an economy grows, the higher its standard of living. Economic growth can be caused by increasing the supply of either labor or capital, or by making better use of existing resources, which increases productivity.
Adding more capital to an economy can make it grow faster because it makes more output per unit of input. However, there are limits to how much more this can help. In the long run, sustainable economic growth comes from increasing the productivity of existing assets—that is, using fewer resources to produce more.
An economy recovering from a recession can achieve relatively high rates of growth as demand for goods and services recovers from weak levels. This catch-up growth often reflects businesses hiring more workers and more fully utilizing the productive capacity that had been idled during the downturn. It may also reflect companies catching up on depreciation of capital assets.
An economy with low taxes, light regulation, and open markets tends to grow fastest. This is because more people can afford to spend money on things that benefit them. But the pursuit of growth does have costs. Faster growth can lead to pollution, climate change, and ozone depletion, and it can stress the workforce and lead to inequality. The best way to reduce these costs is by pursuing policies that promote more sustainable, broad-based economic growth.