What is economic growth?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Economic growth occurs when the people in a given economy come to be able to produce more goods and services in a given time frame.  There are different ways to measure economic growth and different ways for it to come about.

On a very basic level, we can measure economic growth in broad terms.  We can ask how much value (price times number of goods and services produced) was created in an economy in one year compared to another.  If the value produced (usually called the Gross Domestic Product, or GDP) in the later year is higher, economic growth has occurred.  However, this is a poor measure of growth for two reasons.  First, inflation can increase prices, making GDP rise even when the economy is producing the same number of goods and services.  Second, the population can rise.  When this happens, more workers can produce more goods and services, but they are not getting any better at doing it.  Therefore, the best way to measure economic growth is on a per capita basis, adjusted for inflation.

This leads to the question of what causes economic growth.  Some growth can be achieved simply by gaining more resources.  If a country makes steel and it finds more iron ore and more workers, it can make more steel and economic growth has occurred.  But there is a more important source of economic growth.  That is innovation and improvements in technology.  If someone invents a more efficient way of making steel, they can make more steel using the same amount of ore and, perhaps, fewer workers.  This frees up workers to perform other tasks and it means that there is more steel to be used or exported.

Economic growth, then, is the increase in an economy’s ability to produce goods and services in a given time period.  The best economic growth is that which occurs when the economy learns how to make more goods and services using the same amount of resources. 

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