Economic growth is the accumulation of new wealth in a country. More wealth means that people can buy more goods and services and live better lives. Understanding what causes economic growth is a central goal of macroeconomics and the study of developing economies.
The two main ways to grow the economy are to increase inputs or increase the productivity of existing inputs. Inputs include labor, capital, raw materials, and other factors of production. Adding more labor or more capital goods to an economy will increase economic output. Increasing the productivity of labor and capital will also increase economic output.
Historically, most of the world’s economic growth has come from an increase in labor productivity. Over the past 50 years, it has been responsible for half of the world’s economic growth and three-fourths of U.S. economic growth. Labor productivity has increased because of a rising population and the development of technology.
A second way to grow an economy is to increase investment. This increases the long-term productive capacity of an economy and is often incentivized by governments through lower taxes or subsidies for investments. Investment is often cyclical and can be impacted by commodity price booms and busts.
In order for economic growth to occur, aggregate demand must increase in a way that can be sustained at each new level of economic output. This requires an adequate supply of resources to be available and the ability to combine them in the most productive way possible. This is a fundamental economic problem and the subject of much study by economists and researchers.