The term 'Economic Growth' is included in the Economics edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
Economic growth represents a boost in an economy’s ability to create and produce services and goods. This is compared from one period of time against another. There are two ways to measure this phenomenon. It may be quantified either in real or nominal terms. When real terms are used, economists have to adjust them for the effects of inflation.
Historically and routinely, total growth in an economy is determined and expressed in the form of either the old standard of GNP Gross National Product or the more recent standard of GDP Gross Domestic Product. There are also other infrequently utilized metrics for measuring growth in an economy.
The simplest way to express such economic growth is by utilizing total productivity. Gains in productivity often correspond to an increase in the average marginal productivity. In other words, the typical worker within a specific economy becomes more productive as the economy is growing. Economies may also obtain growth even without such an average marginal productivity increase. This happens when there are more births than deaths (higher birthrate) or as additional immigrants come into an economy and begin to work. It can also result from technological revolutions. Examples of this are the Industrial Revolution, the computer revolution, or the Internet revolution.
It is always true that economies experiencing economic growth will be able to produce a higher quantity of services and goods than they did before the growth transpired. Yet there are those services and goods which command a higher value than competing goods or services. Examples of this abound. Smart phones or laptops are considered to have a higher value economically than bottles of water or a shirt. This is why growth in an economy is effectively figured up by measuring the total value of goods and services which the economy produces instead of simply the quantity.
An additional dilemma comes as different consumers put varying values on identical services and goods. For example, for residents of Alaska an effective heater would command a higher value than it would for residents of southern California. Similarly, in Florida efficient air conditioners have greater value than they do in Canada. Other individuals prefer fish to steak, or steak to fish. Value is always subjective. This is what makes measuring the value of all goods and services challenging. It is ultimately why the current fair market value is what economists employ to determine value for the purposes of measuring economic growth.
Interestingly enough, only a few means exist to create growth economically. A relatively straightforward one is through the uncovering and exploitation of better or newly discovered physical economic resources. Before gasoline was discovered to have the ability to generate energy, petroleum had very little economic value. Gasoline and hence petroleum began to create economic growth once this discovery was made. This was true for those countries with an abundance of petroleum they could export as well as for countries that utilized the gasoline to more effectively move goods across their nations.
A second means of producing economic growth is by increasing the size of the labor force. When every other factor is equal, a greater number of workers will produce additional services and goods. Much of the impressive economic growth in the United States through the 1800s came from a constant inflow of productive and inexpensive immigrant labor.
The third means of creating such growth is by developing better capital goods or higher technology. Such capital growth and technological improvements are closely correlated to the level of business investment and savings. Both are needed for firms to pursue a significant amount of R&D, or research and development.
The final method for boosting economic growth lies in better specialization of labor pools. In other words, the workers have to increase their skills at their crafts. This boosts productivity because of extra practice or through experimenting with new or improved methods. Investment, savings, and specialization are the easiest to control and most reliable means of increasing the growth in an economy.