Economic growth is the increase in the amount of goods and services produced by an economy over a period compared with its starting point. It’s generally measured in terms of gross domestic product (or GDP), but alternative metrics are also used.
Growth is the result of increases in aggregate demand and the supply of labour and materials, as well as improvements in productivity and the development of new technologies. It’s a long-term process, but in the short term there can be ups and downs which economists call the business cycle. The ups and downs are caused by fluctuations in aggregate demand, which are influenced by a number of factors such as changes in consumption, investment, and government spending.
The main driver of economic growth is consumer spending, which makes up the largest component of GDP. It’s important to note that consumer spending isn’t constant and can fluctuate from quarter to quarter, depending on a number of factors such as a surge in imports or the level of unemployment.
A key way to generate economic growth is by growing the labor force. More workers produce more economic goods and services, and their productivity is a major factor in generating growth.
But economic growth doesn’t necessarily tell us everything we need to know about a nation’s well-being. For example, it doesn’t measure how evenly the fruits of economic growth are distributed across society – if children’s schooling is subsidized, it will appear in GDP but not in household incomes.