A common measure of economic growth is gross domestic product (GDP), a measure of all goods and services produced by a nation. GDP includes the sale of raw materials, production, and distribution of goods. It also includes the value of foreign trade and services, as well as the income sent home by citizens who work abroad.
Economies that grow faster are better off overall than those that do not. Faster economic growth increases the overall size of a country’s economy, strengthens fiscal conditions and broadens a typical household’s material standard of living.
There are many ways to achieve economic growth, including expanding labor, increasing the output of existing resources, and investing in new technology. Expanding labor – through native population growth and immigration – increases potential economic output, as does growing the productive capacity of current workers by investing in tangible capital goods like machines, offices and factories or intangible assets such as computer software and research and development.
Investments in physical and human capital are essential for growth, but they must be matched by an increase in the supply of money to finance them. This can be achieved through a combination of lower taxes and more investment in public goods such as education and health care or through private sector spending on investment in machinery, computers, roads, bridges and other physical infrastructure or in research and development.
In the past, large structural reforms accompanied nearly every growth acceleration episode in Europe and Latin America but were less frequent in South Asia or Sub-Saharan Africa. In general, however, luck played a large role in growth acceleration episodes, as did differences in institutions and natural endowments.