Economic growth

Economic growth refers to an increase in the quantity and quality of goods and services produced by a society.

Economists measure this growth by looking at the increase in inflation-adjusted output over a specific period. This measurement is often called real Gross Domestic Product, or real GDP. Using "real" values is important because it removes the distorting effects of inflation. Inflation occurs when prices rise, which can make an economy look larger even if it is not producing more. To understand how much an average person benefits, experts calculate GDP per capita. This is the total GDP divided by the total number of people in the country.

There are two distinct ways that an economy can expand. The first is called extensive growth. This happens when a society increases the total amount of inputs available for use. Examples include an increase in the total population or the acquisition of new territory. The second type is called intensive growth. This occurs when a society uses its existing inputs more efficiently. This efficiency is known as productivity. Productivity involves getting more output from labor, physical capital, energy, or materials.

Experts use national income accounting to track these changes through various factors. These include labor productivity, the number of hours worked, and the participation rate of the working-age population.

Productivity has historically been the most significant driver of real per capita economic growth. In the United States, MIT Professor Robert Solow reached a famous conclusion about this relationship. He estimated that technological progress accounted for 80 percent of the long-term rise in U.S. per capita income. He found that increased investment in capital explained only the remaining 20 percent. High productivity is vital because it lowers the real cost of goods. In fact, during the 20th century, the real price of many goods fell by more than 90 percent.

This allows people to buy more with the same amount of work.

History shows that economic growth can fundamentally change how humans live. Before the Industrial Revolution, many societies faced the Malthusian trap. This was a condition where technological progress only increased the population, which was then limited by food supplies. The Industrial Revolution allowed growth to exceed population growth, providing an escape from this trap. During this era, mechanization began to replace hand methods in manufacturing. New processes streamlined the production of iron, steel, and chemicals. The development of machine tools also made it possible to create interchangeable parts.

This led to the era of mass production used today.

The Second Industrial Revolution brought even more significant changes to productivity. One major factor was the substitution of inanimate power for human and animal labor. Steam-powered electricity and internal combustion engines replaced limited wind and water power. Other major historical sources of productivity included automation and new transportation infrastructures like railroads and canals. Improvements in agriculture, such as the Green Revolution and the use of chemical fertilizers, also boosted output. These advancements allowed for a massive expansion of total power and energy efficiency. These changes helped move societies into a new era of production.

Economic growth also impacts the way people work and the structure of society. In the United States, the average work week was 49 hours in the 1920s. After the National Industrial Recovery Act of 1933, the work week was reduced to 40 hours. As countries industrialize, they often experience a demographic transition. This process involves declining birth rates and an increase in the average age of the population. During this transition, women often join the labor force in higher percentages. Additionally, children often spend more years in school rather than working. This builds human capital, which is the collective skills and knowledge of the workforce.

We can see the power of growth by comparing different regions and eras. In 1957, South Korea had a lower GDP per capita than Ghana. However, by 2008, South Korea's GDP per capita was 17 times higher than Ghana's.

While growth in the United States slowed after 1973, growth in many Asian countries has remained strong. In the U.S., productivity growth saw a spike between 1996 and 2004. This was due to Moore's law, which describes the rapid rate of technological innovation. Understanding these patterns helps economists study how different nations move through various stages of development.