The most popular measure of economic growth is gross domestic product (GDP), which adds up all the money spent by consumers, businesses, and governments. Governments can stimulate GDP by lowering interest rates, making it cheaper to borrow. But this can only last so long before the economy eventually overheats, leading to inflation and a recession.
The best way to generate sustained growth is to increase the productivity of labor, or output per hour worked. This can happen by giving workers better and more tools, such as computers, or by investing in research and development to create new products and technologies. It can also happen if firms and markets grow, as they do when discrimination disappears or tariffs are lowered, making it easier to buy more goods and services from abroad.
Another source of growth is the accumulation of physical capital goods, such as buildings and machinery. This can increase production by making factories more efficient and increasing the efficiency of farmers or fishermen with better equipment. The growth in capital can also be the result of people saving, which frees up resources to invest in more capital goods.
The big advantage of economic growth is that it increases the material standard of living for most people. In a growing economy, people earn more money and spend it more freely, helping to reduce poverty, hunger, and disease around the world. In contrast, when an economy is stalling or shrinking, people will earn less and spend less, leaving them feeling worse off.
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