A country’s economic growth is its increase in the size of its economy – the total value of goods and services it produces. Growth can be measured in a variety of ways, but economists often focus on a measure called gross domestic product (GDP). GDP measures the value of all the goods and services produced by a nation’s citizens, businesses, and governments over time. GDP includes everything from cars to bottled water, but excludes the value of some activities such as caring for children (which is included in GDP if it is done by paid childcare workers, but not by parents).
Economic growth can be caused by an increase in labor, capital, or productivity. An increase in capital increases the amount of output that can be generated by a given input of labor, such as by using better tools or equipment (e.g., a fisherman with a net will catch more fish per period than one who is using an old fishing rod). Labor productivity increases when workers are trained and provided with new tools and technology, such as computers that make it easier to file tax returns or a tractor that harvests crops faster than older models.
A combination of these factors typically determines economic growth. However, economic growth has also been boosted by policy initiatives such as fiscal stimulus and monetary tightening. These are generally effective at boosting short-term growth, but they don’t necessarily lead to long-term prosperity. For instance, rising interest rates can undermine economic growth by making debt more expensive and raising inflation. And climate shocks can slow economic growth by disrupting agricultural production.