What does economic growth mean

Bringing these definitions together, and taking into account the economic literature more broadly, I suggest the following definition:.

Economic growth describes an increase in the quantity and quality of the economic goods and services that a society produces. I prefer a definition that is slightly longer than most others. The most important change in quantity is from zero to one, when a new product becomes available. Many of the most important changes in history became possible when new goods and services were developed; think of antibiotics, vaccines, computers, or the telephone.

You find more thoughts on the definition of growth in the footnote. This bypasses a key difficulty in its definition and measurement. Economic growth is not concerned with all goods and services, but with a subset of them: economic goods and services.

Should we count the tooth-brushing and the toast-making towards the economic production of the country we live in? But we have to draw the line somewhere. The sketch illustrates the idea. The production boundary defines those goods and services that we consider when we speak about economic growth. But for some of them it can be complicated to decide on which side of the production boundary they fall.

One example is the question of whether the production of illegal goods should be included. Another is whether production within a household should be included — should we consider it as economic production if we grow tomatoes in our backyard and make soup from them? Different authors and different measurement frameworks have given different answers to these questions. There are some characteristics that are helpful in deciding on which side of the boundary a particular product falls. They stand in contrast to free goods, like sunlight, which are abundant, or those many important aspects in our lives that cannot be produced, like friendships.

An economic good or service is provided by people to each other as a solution to a problem they are faced with and this means that they are considered useful by the person who demands it. An activity is considered to be production in an economic sense if it can be delegated to someone else.

This would include many of the goods and services on that long list we considered earlier, but would exclude your breathing, for example. Because economic goods are scarce in relation to the demand for them, human effort is required to produce them. The majority of goods and services on that long list above are uncontroversially of the economic type — everything from the light bulbs and furniture in your home to the roads and bridges that connect it with the rest of the world.

They are scarce in relation to the demand for them and have to be produced by someone, their production is delegable, and they are considered useful by those who want them. Imagine two countries that are identical except for one aspect, home ownership. In Country B everyone owns their own home and no one pays rent. To avoid such misjudgment, the production boundary includes the housing services that are provided without any monetary transactions.

GDP does not only include the housing services by owner-occupied housing, but also the provision of most goods and services that are provided by the government or nonprofit institutions.

Many discussions about economic growth are extraordinarily confused. People often talk past one another. I believe the reason for this is that the discussion of what economic growth is , gets muddled up with how it is measured. While it is straightforward enough to define what growth is, measuring growth is very, very difficult.

In the worst cases measures of growth are mixed up with a definition of growth. Growth is often measured as an increase in income or inflation-adjusted GDP per capita. But these measures are not the definition of it — just like life expectancy is a measure of population health, but is certainly not the definition of population health. To see how difficult it is to measure growth, take a moment to think about how you would measure it. How would you determine whether the quantity and quality of all economic goods and services produced by a society increased or decreased over time?

Finding a measure means that you have to find a way to express a huge amount of relevant information in a single metric. As the sketch shows, you have to first measure the quantity and quality of all the many, many goods and services that get produced and then find a way to aggregate all of these measurements into one summarizing metric. No matter what measure you propose for such a difficult task, there will always be problems and shortcomings of any proposal you might make.

In the following section I will show four possible ways of measuring growth and present some data for each of them to see how they can inform us about the history of material living conditions. One possible way to measure growth is to make a list of some specific products that people want and to see what share of the population has access to them. We do this very often at Our World in Data.

The chart here shows the share of the world population that has access to four basic resources. All of these statistics measure some particular aspect of economic growth. You will find that judged by this metric some countries achieved rapid growth — like Indonesia — while others only saw very little growth, like Chad. The advantage of measuring growth in this way is that it is concrete.

The downside is that it only captures a small part of economic growth. There are many other goods and services that people want in addition to water, electricity, sanitation and cooking technology. You could of course expand this approach of measuring growth to many more goods and services, but this is usually not done for both practical and ethical considerations. One practical reason is that a list of all the products that people value would be extremely long.

In practice any attempt to measure growth as access to particular products therefore means that you look only at a relatively small number of very particular goods and services that statisticians or economists are interested in. This is problematic for ethical reasons.

It should not be up to the statisticians or economists to determine which few products should be considered valuable.

You might have realized this problem already when you read my list at the beginning of this text. You might have disagreed with the things that I put on that list and thought that some other goods and services are missing. On our site you find many more such metrics of growth that capture whether people have access to particular goods and services:.

We have to look at the ratio between income and prices. The chart here does this for one particular product — books — and brings us back to the history of growth in the publishing sector that we started with. It shows how long the average worker had to work to buy one book. Note that this data is plotted on a logarithmic axis.

Before the invention of the printing press in the 15th century the price was often as high as several months of work. The fact that books were unaffordable for almost everyone should not be surprising. The chart also shows how this changed when the printing press increased the productivity of publishing. As the labor required to produce a book declined from many months of work to less than a day, the price fell from months of wages to mere hours.

This shows us how an innovation in technology raises productivity and how an increase in production makes it more affordable.

How it increases the options that people have. In the previous section we measured growth as the ratio between income and the price for one particular good. But of course we could do the same for all the many goods and services that people want. A means to many ends in fact. It is because a person has more choices as their income grows that economists care so much about these monetary measures of prosperity.

They are shown in this chart. Both measures show that global inequality is very large. An income of int. You may disable these by changing your browser settings, but this may affect how the website functions. We use analytics cookies so we can keep track of the number of visitors to various parts of the site and understand how our website is used.

For more information on how these cookies work please see our Cookie policy. It is the total value of goods and services produced over a specific time period. Why is economic growth so important? Video transcript - Why does economic growth matter? Meanwhile, weak growth signals that the economy is doing poorly. If GDP falls from one quarter to the next then growth is negative. This often brings with it falling incomes, lower consumption and job cuts. The economy is in recession when it has two consecutive quarters i.

This marked the deepest recession for 80 years. We set interest rates in order to keep inflation low and stable. Achieving this helps create the conditions needed for a healthy economy. Following the EU referendum, for example, we cut Bank Rate from 0. And in fact, whenever we consider different possible policy actions such as a change in interest rates , our remit requires us to pick whichever actions will boost economic growth the most while still meeting our primary objective for low and stable inflation.

We also have responsibilities to ward off the chances of a financial crisis from happening. This also helps create the conditions for economic growth. And here, too, our remit explicitly requires us to factor in the impact on growth when deciding on policy actions that help to keep the financial system safe.

Growth in the economy matters for everyone — individuals, businesses, charities and the government. It feeds in to other spheres of life, too: experts in many fields, from healthcare to climate change, need to make assumptions about future economic growth.

Every three months we forecast economic growth up to three years ahead. Our forecasts are published in our Inflation Report and feed into our decisions about interest rates. View more You may also be interested in…. Would you like to give more detail? Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile.

Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Economic growth is an increase in the production of economic goods and services, compared from one period of time to another.

It can be measured in nominal or real adjusted for inflation terms. Traditionally, aggregate economic growth is measured in terms of gross national product GNP or gross domestic product GDP , although alternative metrics are sometimes used. In simplest terms, economic growth refers to an increase in aggregate production in an economy.

Often, but not necessarily, aggregate gains in production correlate with increased average marginal productivity. That leads to an increase in incomes , inspiring consumers to open up their wallets and buy more, which means a higher material quality of life or standard of living.

In economics, growth is commonly modeled as a function of physical capital , human capital, labor force, and technology. Simply put, increasing the quantity or quality of the working age population, the tools that they have to work with, and the recipes that they have available to combine labor , capital , and raw materials , will lead to increased economic output.

There are a few ways to generate economic growth. The first is an increase in the amount of physical capital goods in the economy. Adding capital to the economy tends to increase productivity of labor. Newer, better, and more tools mean that workers can produce more output per time period. For a simple example, a fisherman with a net will catch more fish per hour than a fisherman with a pointy stick. However two things are critical to this process. Someone in the economy must first engage in some form of saving sacrificing their current consumption in order to free up the resources to create the new capital, and the new capital must be the right type, in the right place, at the right time for workers to actually use it productively.

A second method of producing economic growth is technological improvement. An example of this is the invention of gasoline fuel; prior to the discovery of the energy-generating power of gasoline, the economic value of petroleum was relatively low. The use of gasoline became a better and more productive method of transporting goods in process and distributing final goods more efficiently.

Improved technology allows workers to produce more output with the same stock of capital goods, by combining them in novel ways that are more productive.