Means an increase in output and real incomes. It is usually measured using gross domestic product (GDP) . In seeking to increase GDP, much depends on the quantity and quality of the factors of production in use. Some growth takes place just by increasing the quantity of factors of production, e.g. through immigration.
The important elements in the growth process are:
• Investment , which increases the amount of capital per person employed and increases productivity. This may be generated domestically or may come from abroad.
• Education and training which enhance human capital , again making people more productive.
• Technological change which leads to the availability of bigger and better machines, and also helps to create better ways of managing people. It can increase the quality of the investment that takes place.
• Exports to new markets which increase demand for the country’s products.
These factors in combination have a big impact on growth rates. However, GDP figures must be interpreted with caution. A developing country may have strong growth in GDP and also a high birth rate. This means that per capita income growth is less than the growth of GDP. Also, increases in GDP do not always improve welfare because some of the external effects of growth are not always positive. Pollution, deforestation and climate change can all reduce the positive effects of growth and this will not show in the GDP figures. There is a trade-off between rapid growth and environmental protection and sustainable growth will require more investment in clean technologies. In some countries the opportunity cost of rapid growth is a deteriorating environment.
Rising capacity in the economy, as aggregate supply increases, means that output can grow without inflation accelerating
In practice, economic growth fluctuates with changes in aggregate demand and the economic cycle. It is often possible to follow policies that allow rapid growth in the short run. But if that rate of growth cannot be sustained in the long run then recession or worse may follow.
Economic growth rates fluctuate over the course of the economic cycle. (Source: OECD Economic Outlook.)