A rising economy translates into more people earning more and spending more. But it also means companies growing their operations and employees expanding their skills. Understanding what drives economic growth is vital to public and private-sector leaders, as well as individuals. When an economy is stalling or even contracting, it can be demoralizing to workers, and businesses will spend less and cut jobs. A country’s leaders want to stimulate economic growth by lowering interest rates, which make money cheaper for consumers. But that only works for so long, and higher rates are needed to combat price inflation and avoid overheating the economy.
There are two main sources of economic growth: growth in the overall size of the labor force, and growth in the productivity (output per hour worked) of that workforce. Both can increase the size of an economy, but only strong productivity growth can raise per-capita GDP and income.
Measuring growth is difficult, but economists generally track it by looking at increases in output over a period of time compared to a previous one. This can be done using production possibilities analysis, which shows how more labor and more inputs can produce a greater amount of goods and services (the outward shift of the production possibility curve). The most important factor driving economic growth is technological progress, which accounts for about 40 percent of it. Improved resource allocation and economies of scale explain another 15 percent.