Economic growth is the increase in the market value of goods and services produced within a country in one year over the previous year. It is determined by factors like labor force growth, capital accumulation, and technological progress. The pace of economic growth can fluctuate because of changes in aggregate demand. Economic growth can be measured in both nominal and real terms. Nominal measures include increases in prices as well as volumes of production, while real measures only measure increases in the volume of production without taking into account price changes.
An important model used to explain economic growth is known as Solow’s Law, developed by economist Robert Solow in the 1950s. It states that economic output per worker will increase as the stock of labor and capital increases, but eventually will reach a point where output per worker will remain constant because investment in new labor and capital will equal annual depreciation. It is only through continuous technological progress that new levels of economic output can be achieved. For example, the development of a computer that makes tax filing much faster and easier for employees can significantly boost productivity.
To generate sustainable economic growth, the right incentives must be in place. People must save to free up the resources needed to invest in productive activities. These investments could be in the form of a home, an automobile, or a business. Incentives also must be in place to provide workers with the skills they need to take advantage of opportunities for growth. This requires a functioning education system and good health care.
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