Economic growth

In economics, economic growth is an increase in the quantity and quality of the economic goods and services that a society produces. It can be measured as the increase in the inflation-adjusted output of an economy in a given year or over a period of time.

The rate of growth is typically calculated as real gross domestic product (GDP) growth rate, real GDP per capita growth rate or GNI per capita growth. The "rate" of economic growth refers to the geometric annual rate of growth in GDP or GDP per capita between the first and the last year over a period of time. This growth rate represents the trend in the average level of GDP over the period, and ignores any fluctuations in the GDP around this trend. Growth is usually calculated in "real" value, which is inflation-adjusted, to eliminate the distorting effect of inflation on the prices of goods produced. GDP per capita is the GDP of the entire country divided by the number of people in the country. Measurement of economic growth uses national income accounting.

Economists refer to economic growth caused by more efficient use of inputs (increased productivity of labor, of physical capital, of energy or of materials) as intensive growth. In contrast, economic growth caused only by increases in the amount of inputs available for use (increased population, for example, or new territory) counts as extensive growth. Innovation also generates economic growth. In the U.S. about 60% of consumer spending in 2013 went on goods and services that did not exist in 1869.

In national income accounting, per capita output can be calculated using the following factors: output per unit of labor input (labor productivity), hours worked (intensity), the percentage of the working-age population actually working (participation rate) and the proportion of the working-age population to the total population (demographics). "The rate of change of GDP/population is the sum of the rates of change of these four variables plus their cross products."

Short-term economic changes happen around long-term changes, though they are unpredictable. Recessions may occur, causing GDP to fall, along with productivity, causing unemployment to rise.

Increases in labor productivity (the ratio of the value of output to labor input) have historically been the most important source of real per capita economic growth. In a famous estimate, MIT Professor Robert Solow concluded that technological progress has accounted for 80 percent of the long-term rise in U.S. per capita income, with increased investment in capital explaining only the remaining 20 percent.

Increases in productivity lower the real cost of goods. Over the 20th century, the real price of many goods fell by over 90%.

Economic growth has traditionally been attributed to the accumulation of human and physical capital and the increase in productivity and creation of new goods arising from technological innovation. Further division of labour (specialization) is also fundamental to rising productivity.