Economic Growth

Overview

Description

Economic growth occurs when real GDP rises over time. Growth rates vary tremendously across countries, and some countries have seen a negative growth rate in the recent past. A nation's economic growth rate significantly affects its citizens' standard of living because this rate measures growth in national productivity. If a country experiences a high rate of growth, incomes rise quickly and the growth compounds over time. Important determinants of the rate of economic growth include investment in both physical and human capital, technological progress, the proper use of natural resources, the enforcement of private property rights, and a stable political environment.

At A Glance

• Economic growth occurs when a nation's production is increasing over time.
• A business cycle is an interval of expansion and contraction in the economy.
• Economic research indicates that business cycles do not have a regularity in length, but the stages always occur in the same order (expansion, peak, contraction, and trough). The cycle is often referred to as a "boom or bust" cycle.
• Economic growth can also be measured on a per capita basis to examine how an average person's standard of living has changed over the course of one year.
• If an economy grows at a rate of $X$ percent per year, it will double in size in approximately 70/X years.
• The rate of economic growth is determined by several factors, including investment in both physical and human capital, technological progress, the proper use of natural resources, the enforcement of private property rights, and a stable political environment.
• Physical capital includes all man-made inputs into the production process, such as machinery, tools, and buildings. Because physical capital makes workers more productive, economies with a growing amount of capital per worker will see faster rates of economic growth.
• Human capital involves the education, training, health, and other non-physical assets of workers, increasing their productivity and leading to economic growth.
• Technology is the tools, procedures, education, and knowledge used to transform resources into a final product. Research and development into new technologies is an important part of economic growth.
• Natural resources are naturally existing forms of physical capital that provide inputs to production. Developing better ways of managing renewable resources leads to economic growth, while the overuse of nonrenewable resources may lead to a decline in an economy's future output.
• Property rights and political stability lessen the uncertainty associated with long-term investments and thus increase a country's rate of economic growth.