Economic growth is an important topic not only to economists but also to public and private-sector leaders and individuals. If an economy is growing, companies spend more and people earn more, which generally results in everybody feeling better off than they would have been if the economy had not grown. Economic growth is also a key measure of an economy’s potential, or its ability to increase its standard of living over time.
The fundamental driver of long-run economic growth is better use of resources—more economic output per input, or productivity. This improvement is the result of technological advancements and more efficient economic inputs, including labor, capital equipment and land.
Another source of economic growth is population growth, which increases the number of available workers in the economy. This increase is a function of both natural population growth and immigration.
A third source of economic growth is increased efficiency in the production process. This occurs through investments in machinery, offices and stores, as well as research and development. The rate of this type of economic growth is dependent on the willingness and ability of companies to save and invest.
The most important determinants of economic growth are the policies that governments and business leaders implement. McKinsey research shows that a country’s institutional structure plays a key role in the economic progress it makes.