In the past 50 years, the global economy has expanded sixfold and per-capita income has almost tripled. This unprecedented growth has been fueled by rapid population growth and labor productivity gains. But not all countries have benefitted equally. Some have experienced spectacular economic growth, propelling them into the ranks of the rich world, while others have stagnated or even shrunk. Why is that?
The most common measure of economic growth is gross domestic product (GDP), which represents the total value of all goods and services produced in a country in a given period. GDP is calculated by adding up consumer spending, business investment, government spending and net exports.
When economic growth is strong, it usually means that people and businesses are earning more money and feeling better off. When economic growth slows or stalls, it can lead to job losses and financial stress. Eventually, it can cause outright recessions and other social problems.
But understanding what causes economic growth isn’t simple. One major problem is that different individuals place different values on the same goods and services. For example, a heater is worth more to someone living in Alaska than it is to someone living in Florida. Another issue is that increasing the number of workers doesn’t necessarily lead to economic growth if those new workers don’t generate enough additional output to cover their basic needs.
Economists study several factors that contribute to economic growth, including energy use, trade, capital, labor and foreign direct investment. Their results generally show that a one percent increase in any of these factors is associated with a corresponding one percentage point rise in economic growth.