Economic growth is important to individuals, businesses, and governments. Increasing economic growth allows people to earn more, spend more, and generally feel better off. When economies slow down, it can lead to unemployment and even bankruptcy. So, understanding how an economy grows—and why some countries grow faster than others—has been a major focus of economists for over two centuries.
There are many ways to produce economic growth, but they all share a few things in common: new capital (like machinery or cars), more labor, and increased productivity. The new capital must be used productively—the worker needs to use it to generate goods and services. The labor must be capable of producing more output per period. And the productivity must be improved—newer, better tools allow workers to generate more output per period than older ones do.
Another way to boost economic growth is by growing the population—more workers create more economic output, but this only works under certain conditions. The first is that the new workers must be productive enough to justify their addition to the economy, and they must be willing to work hard to do so. The second is that the workers must be able to save and invest their wages.
Finally, the economy must be rich enough to attract flows of global financial capital. While many different factors can spur growth, the orthodox approach of structural reforms combined with macroeconomic policies seems to be the most effective strategy. Moreover, strikes of luck—like the end of conflict or the discovery of natural resources—seem to precede slightly more than one fourth of all growth accelerations.
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