Economic growth is the increase in a country’s total production over time, usually measured as a country’s gross domestic product (GDP). It’s an essential measure of an economy’s health and well-being. This article looks at what drives and limits economic growth—and how we can do better.
Economists divide economic growth into two broad categories: long-run economic trends and short-term changes in output. The latter is called the business cycle, and most of it can be attributed to fluctuations in aggregate demand. Long-run economic trends tend to be driven by factors like technology and capital accumulation.
A growing economy can increase its GDP by adding more goods and services, or it can improve the quality of its existing products. In the latter case, improving productivity is key to economic growth. Investing in new tools, machines, and infrastructure can reduce the amount of labor needed to produce one product, freeing up workers to make more of them. This is why economists frequently talk about increasing productivity.
McKinsey research shows that boosting worker productivity is the only way to sustainably increase overall GDP over the long term. There are a number of ways to do this, but the most important is investing in human capital. This involves educating and training workers to be more productive, which can help them earn higher wages.
It’s also important to make sure that a country’s GDP is adjusted for inflation, so that it reflects the actual value of the goods and services produced. This helps to avoid distortions caused by price increases that don’t reflect true economic growth.