Economic growth — or a country’s rate of increasing per-capita gross domestic product (GDP) — is the hottest policy issue facing elected officials in advanced and developing economies alike. Understanding what drives it remains one of the most challenging questions in economics.
Growth can be fueled by many factors, but two of the most important are growing the potential labor force and growing potential labor productivity. The former is accomplished through native population growth and immigration, while the latter is achieved by business investment in tangible capital goods like machines and buildings and intangible capital such as R&D.
Faster growth in GDP increases a typical person’s material standard of living, but GDP measures only market activity and does not necessarily capture all economic welfare improvements. A parent who stays home to care for children or an elderly relative may not contribute to GDP, but their non-market activities — raising a family and caring for others in ways that enhance societal well-being — do.
Economic growth is also driven by innovations in technology, which increase the value of goods and services by making them easier or cheaper to produce or use. For example, the economic value of petroleum was relatively low before it was discovered that burning it in cars creates energy that can power a modern economy. Other examples of technological breakthroughs are better farm machinery and computer chips that speed up the processing of information.