Economic growth

Economic growth

Economic growth is an important idea in economics. It means that a country is making and providing more and better goods and services over time. This can be measured in different ways, such as looking at how much more a country produces in a year compared to the year before, after adjusting for changes in prices.

We can figure out the rate of economic growth by seeing how much a country's total production, or GDP, has grown from one year to the next. This helps us understand the general trend, not just ups and downs along the way. When we talk about growth, we usually look at "real" values, which means we adjust for inflation so that price changes don’t confuse the picture.

Economists talk about two main types of growth. One type happens when we use our resources — like workers, machines, energy, and materials — more wisely and efficiently. The other type happens when there are simply more resources available, like more people or new land. New ideas and inventions also help a country grow.

Determinants of economic growth

Economic growth means a country makes more and better things over time. We can see this by looking at how much each worker makes, how many hours people work, and how many people are working.

Sometimes the economy can slow down or even shrink. This is called a recession. During recessions, people may lose their jobs because companies make less money.

Productivity

The biggest reason why countries grow is that people and machines make things better and faster over time. For example, a factory might use new machines that let one worker make more products than before.

When productivity goes up, things cost less to make. This means prices for everyday items can go down. Over the last hundred years, many things we use every day have become much cheaper because we make them more efficiently.

Before factories became common, making more things often meant having more children to help work. But once factories started using machines, they could make more things without needing as many people. This helped countries grow even when their populations didn’t get bigger.

Factor accumulation

Economic growth also happens when there are more machines, buildings, and tools to help make things. When companies invest in new equipment, they can produce more. But there are limits to how much they can invest before it doesn’t help as much.

The number of hours people work can also change growth. In the past, people worked very long weeks. Over time, the work week got shorter, meaning people worked fewer hours but still made more because they were more productive.

Human capital

Another big part of growth is how educated and skilled people are. When people go to school and learn new skills, they can help make and do more things. Countries where people have more education often grow faster.

Health

When people are healthy, they can work better and for longer. If people get sick often, it can slow down growth because they can’t work as much. Keeping people healthy helps the whole economy grow.

Political institutions

How a country is run can also affect growth. Countries with fair laws and good government systems often grow better. When people trust the rules and feel safe to build businesses, the economy can grow more steadily.

Democracy and economic growth

Some studies show that countries where people have a say in how things are run tend to grow better over time. Giving people a voice can help encourage new ideas and better use of resources.

Entrepreneurs and new products

New ideas and products also drive growth. When people start new businesses or invent things, they create jobs and make life better for everyone. Even though it’s hard to measure exactly how much this helps, we know it’s very important.

Structural change

Finally, how an economy is put together changes over time. For example, many countries started by farming, then moved to making things in factories, and now many work in services like teaching, healthcare, and technology. These changes help economies grow in different ways over different times.

Growth theories

Adam Smith

Adam Smith began modern ideas about how economies grow in his book The Wealth of Nations, published in 1776. He thought two things help an economy grow: people working together in different jobs and saving money to buy machines (capital accumulation). But these work best if there are enough customers to buy what people make and sell.

Malthusian theory

The Malthusian theory says that families can have many children quickly, but food and other resources grow more slowly. This can cause big problems if there are too many people and not enough food. The theory also says that inventions can lead to more people, but they don’t make everyone richer in the long run.

Classical growth theory

Classical economics says that using more workers or more machines (factors of production) can make more things. But each extra worker or machine makes a little less extra stuff each time you add one. This is called diminishing returns. Some people thought technology didn’t change, or that big changes in the economy couldn’t happen easily.

Solow–Swan model

Robert Solow and Trevor Swan created a main model for studying growth in the 1950s. They said that adding more machines or workers helps at first. But because each extra machine helps a little less, the economy reaches a point where growth slows unless new technology arrives. If new technology makes things better, growth can keep going even when the economy has settled down.

Endogenous growth theory

Some economists wanted to explain why technology improves instead of just assuming it does. They created endogenous growth theory in the 1980s. This theory says that things like education and new ideas (human capital) are very important for growth. It also talks about how new inventions can change the economy, sometimes making old ways of doing things obsolete.

Unified growth theory

Unified growth theory tries to explain how economies change over all of history. It says that for most of human history, new discoveries were balanced by more people being born, so most people didn’t get much richer. But over time, putting more money into education, and having fewer children, helped economies grow faster and for everyone to benefit.

Inequality and growth

Further information: Economic inequality and Effects of economic inequality

Ideas about how sharing money affects growth have changed a lot.

Older ideas said that fairness helps growth because richer people save more, which can help build things and create jobs. Newer ideas say that fairness might not matter for growth. But recent thinking shows that how money is shared can affect growth. Some experts say that when money is shared more evenly, people can get better education and training, which helps everyone become richer over time.

Studies show that places where money is shared more fairly often grow faster and keep growing longer. Other research finds that when money is shared less fairly, growth can slow down, especially in richer countries. This happens because people may not have the same chances to learn and improve their skills when money is not shared fairly.

Long-term growth

Living standards are different in different countries, and they change at different speeds over time. The table below shows how much goods and services each person could buy in different countries over about 100 years, after adjusting for price changes. This is called "real" GDP per person.

Even small differences in how fast a country's economy grows each year can lead to big changes over time. For example, in 1870, the United Kingdom had more goods and services per person than the United States. But by 2008, the United States had more. This happened because the United States grew a bit faster each year, and over many years, this small difference added up to a big one.

Importance of long-run growth

Over many years, even a small growth rate can lead to big changes. For example, the United Kingdom's economy grew slowly but steadily from 1830 to 2008. Because of this, the amount of goods and services per person increased a lot during that time.

This big effect over time is because of how growth adds up. A simple rule called the "rule of 72" shows that if something grows by a certain percentage each year, it will double in about 72 divided by that percentage of years. So, a growth rate of 2.5% each year means the economy would double in about 29 years, while an 8% growth rate would double it in just 9 years. Small differences in growth rates can lead to very different living standards if they continue for many years.

Considerations

Quality of life

One idea connects economic growth with quality of life. It suggests that as an economy grows, people’s lives improve — up to a certain point. Growth can help reduce poverty by creating more jobs and making work more productive.

Equitable growth

For growth to truly help everyone, especially the poorest people, special efforts are needed. If a country has low inequality, even modest growth can cut poverty in half in about ten years. But in countries with high inequality, it can take nearly sixty years to achieve the same result. This is why many believe economic growth alone isn’t enough — we must also make sure it benefits everyone equally.

Environmental impact

Some worry that focusing only on economic growth can harm the planet. Concerns include using too many natural resources and polluting the environment. Ideas like using fewer resources and protecting nature have been suggested. Others believe human creativity can solve these problems, but many scientists warn that we’re using resources faster than they can be replaced.

Global warming

Economic growth often goes hand-in-hand with more pollution, especially carbon dioxide emissions. Scientists say that to avoid dangerous climate change, we need to limit these emissions. Some suggest switching to cleaner energy sources like wind, solar, and hydro power.

Resource constraint

In the past, worries about running out of resources haven’t always come true, thanks to new technologies and discoveries. For example, better farming methods and new ways to find materials have helped us use resources more wisely. However, some believe we can’t keep growing forever without running into limits.

Energy

Economic growth usually needs more energy. Even as we get better at using energy efficiently, growth still requires more overall energy use. Improvements in energy efficiency have been key to progress.