Whether you are a personal investor, a business owner or an employee, growth is something you want to see in your paycheck and in your bank account. But measuring economic growth for an entire nation is a lot harder than knowing whether you have more money in your checking account today than yesterday. The question of how to boost economic growth—and what drives it, both in the short run and over time—is one of the most fascinating and important questions in all of macroeconomics.
The most common way to measure economic growth is by looking at gross domestic product (GDP). GDP measures all of the spending on a country’s goods and services in a given period. It’s calculated by adding up the total amount of spending by consumers, businesses and governments.
Over the past 50 years, real world economic output has increased sixfold, and average global per capita income has tripled. These unprecedented gains are due in large part to a surge in labor productivity, which is the increase in the value of output divided by the number of hours worked.
However, there are many other factors that can influence economic growth. Some increase GDP but do not necessarily make people or companies better off—such as the initial spending to rebuild after a natural disaster, which can boost GDP but does not increase overall wealth. Other factors, such as inequality and the structure of taxation, can also affect economic growth. For example, higher levels of inequality can slow growth by reducing the propensity to save by individuals in lower-income groups.