Economic growth is the increase in the value of the goods and services produced by an economy over a period of time. This is also referred to as real GDP growth and is the most common way to measure economic progress. It is usually measured on an annual basis, although quarter to quarter and year-over-year comparisons are also commonly used.
There are many causes of economic growth, but the fundamental cause is a rise in the economy’s productive potential. This is achieved by increasing the number of factors of production (land and natural resources, labor, capital equipment, and entrepreneurship) or by enhancing their productivity.
Typically, improved technology (i.e., new tools that allow workers to produce more output per unit of input) is one of the most important drivers of economic growth. For example, a fisherman with a better net can catch more fish in the same amount of time as the one who uses a poor-quality net.
Aside from the technological component, economic growth also depends on demand. A growing population, more savings, and increased foreign investment also fuel economic growth by increasing the total pool of available resources. To sustain growth, however, aggregate demand must rise above full employment and the economy must achieve both productive and allocative efficiency.
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