Definition
Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.
Economic Growth
What is ‘Economic Growth’
Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. It can be measured in nominal or real terms, the latter of which is adjusted for inflation. Traditionally, aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes used.
Explaining ‘Economic Growth’
In simplest terms, economic growth refers to an increase in aggregate productivity. Often, but not necessarily, aggregate gains in productivity correlate with increased average marginal productivity. This means the average laborer in a given economy becomes, on average, more productive. It is also possible to achieve aggregate economic growth without an increased average marginal productivity through extra immigration or higher birth rates.
Measured in Dollars, Not Goods and Services
A growing or more productive economy can make more goods and provide more services than before. However, some goods and services are considered more valuable than others. For example, a smartphone is considered more valuable than a pair of socks or a glass of water. Growth has to be measured in the value of goods and services, not only the quantity.
Causes of Economic Growth
There are only a few ways to generate economic growth. The first is a discovery of new or better economic resources. An example of this is the discovery of gasoline fuel; prior to the discovery of the energy-generating power of gasoline, the economic value of petroleum was relatively low. Gasoline became a “better” and more productive economic resource after this discovery.
Further Reading
- The direction of causality between financial development and economic growth – www.sciencedirect.com [PDF]
- International financial liberalization and economic growth – onlinelibrary.wiley.com [PDF]
- Does too much finance harm economic growth? – www.sciencedirect.com [PDF]
- Does financial development 'lead'economic growth? A vector auto-regression appraisal – www.tandfonline.com [PDF]
- Financial development and economic growth: evidence from panel unit root and cointegration tests – www.sciencedirect.com [PDF]
- Innovation and economic growth – www.oxfordhandbooks.com [PDF]
- Prosperity without growth: Economics for a finite planet – journals.sagepub.com [PDF]
- Financial development and economic growth: the case of Taiwan – www.tandfonline.com [PDF]
- Financial development and economic growth: assessing the evidence – academic.oup.com [PDF]
- FDI and economic growth: the role of local financial markets – www.sciencedirect.com [PDF]
