Economic growth refers to the increase in a country’s national income and the improvement of its people’s standard of living. This is a broad goal that is achieved by expanding the amount of physical capital—building factories and infrastructure, or investing in machinery—and human capital—educating workers to make the most of their skills, which helps them create more goods and services. Technological improvements also help. For example, the invention of gasoline fuel allowed vehicles to travel faster, which increased the amount of goods and services produced.
Economic output is measured as real gross domestic product (GDP). GDP includes all money spent by consumers, businesses and governments. It can also be measured quarterly at a year-over-year rate. If the change in one quarter is 2%, that’s equal to 1.2% for the year.
The first step in creating economic growth is to save or invest. This money then becomes available for business investments or consumer spending. Governments can also stimulate economic growth by cutting taxes or giving rebates. These actions promote consumption and production, and they may also boost employment.
While increasing the amount of capital and labor helps produce more goods and services, there are limits to this type of growth. Sustainable long-term growth involves improving the use of existing resources, including the exploitation of natural resources. For instance, better farming techniques can allow a farmer to grow more food with the same inputs. Or, improved technology allows workers to produce more with each hour of work.