Economic growth is the increase in an economy’s ability to produce more goods and services. It can occur in a variety of ways. These include increasing the physical capital in the economy through the purchase of machines, buildings, and infrastructure; increasing the knowledge or skill of workers by educating them; and improving an economy’s recipe for producing more goods and services with the same number of people and resources (i.e., its human and/or physical capital).
These factors are often referred to as “aggregate demand.” An economy can achieve relatively high rates of aggregate demand growth during economic expansions by eliminating excess unemployment and more fully utilizing the capacity of the economy through business investment in tangible assets such as machinery or offices, as well as intangible assets like R&D or patents.
Another type of economic growth, referred to as “catch-up” growth, occurs when an economy is recovering from a recession. This can happen when consumer spending and other demand components rebound from weak levels during the recession. Business investment can also make a big contribution to GDP during recovery periods as companies rebuild or expand their inventory and facilities.
Long-term economic growth can happen in several ways, including increased productivity, improved technology, and increases in the size of the labor force through immigration or population growth. The latter typically comes with the requirement that the new workers are productive enough to allow them to consume their own goods and services without consuming more than they create, which is the definition of sustainable economic growth.
About the Author
