Economic growth means more money, goods and services are available to the citizens of a country. Economic growth can come from two sources: growing the amount of capital in a country (like machinery or buildings) or growing the output per worker (like labor productivity). Both types of economic growth improve people’s material standards of living but only strong productivity gains create sustainable long-term economic growth.
An economy that experiences a recession can achieve rapid economic growth by catching up on its backlog of delayed consumer spending and fully utilizing idled production capacity. This “catch-up” growth can be a precursor to future sustainable economic growth.
Historically, countries with higher rates of economic growth have often shared characteristics that are related to economic institutions. These include laws, regulations and customs that govern business behavior and provide incentives for productive activity. Institutions also include social and political structures that influence an economy’s culture and values.
The neoclassical economic model of growth assumes that technological progress is neutral to economic growth and that capital and labour are the main determinants of production activities. While this assumption is true in many cases, the global economy has become much more complex since its postwar golden age. New challenges, such as the pandemic and climate change, are raising questions about whether GDP-based metrics can capture important aspects of these changing conditions. It is now more important than ever to take a holistic approach to understanding economic growth.