Economic growth is a measure of a country’s increased production of goods and services. It is an important indicator of an economy’s health and progress but its success depends on how widely the benefits are shared amongst people and businesses, as well as how sustainable it is. It can be measured using GDP per capita, an inflation-adjusted measure or other aggregate measures.
A major difficulty with measuring economic growth is that it requires quantifying the value of goods and services. This can be difficult since different individuals place different values on the same goods and services: a heater is more valuable to someone living in Alaska than a pair of socks. The value of a good or service can also vary by region and even between individuals within the same population, depending on factors like weather, preferences, and income.
Many economists have described a variety of processes by which economies grow. Early writers, given to metaphor, stressed the resemblance between economic development and human life-cycles (e.g., childhood, adolescence and maturity). More recently, researchers have identified a number of key drivers for economic growth including technological innovation, labor productivity, and investment.
Technological innovation allows workers to produce more output with the same amount of inputs, which boosts labor productivity. This can be combined with capital productivity, which is a measure of how much output is produced by the stock of physical capital assets, such as buildings or machinery. Investment is a vital component of economic growth, since the money that goes into an investment produces income for other households and businesses, allowing them to buy more goods and services. Business cycles can have a significant impact on actual economic growth and policymakers must be able to respond quickly to shifts in demand.