Increasing economic growth is a major goal for global policy makers. A growing economy means more jobs, more people living above poverty levels and higher standards of living for everyone. Several factors can lead to economic growth, but in the long run sustainable economic growth depends on better use of existing resources, meaning more output per unit of input. This is known as productivity growth.
The first factor that contributes to economic growth is an increase in the amount of physical capital in the economy. New, better or more tools can help workers do more in the same period of time. For example, a fisherman with a new net will catch more fish in an hour than a fisherman with a rod. The other important factor is an increase in human capital, such as education and training. Educated labor can make more efficient use of existing technology and produce more goods and services with the same inputs.
Another way to achieve economic growth is by growing the potential output of the economy, also called its “potential GDP.” This can be achieved through native population growth or immigration, business investment in tangible capital such as machinery and buildings, and investments in R&D and other intangible capital.
The final element of economic growth is a rise in aggregate demand, which can be achieved through a number of methods. Several recent studies find that policies like tax cuts or government spending increases tend to boost economic growth by boosting demand. But these effects can be short-lived and are difficult to maintain over the long run.