Economic growth is an increase in the inflation-adjusted production of goods and services in an economy over time. It is commonly measured through the change in real gross domestic product, or real GDP, over a specified period. Because nominal GDP can rise simply because prices have increased, real measures attempt to separate changes in production from changes in the general price level. Growth can be reported for an entire economy or on a per-person basis.
Total real GDP growth indicates whether the economy is producing more overall, while real GDP per capita adjusts for population changes and is often more informative when considering average material living standards. Economic growth can occur through increases in the quantity of labour and capital or through improvements in productivity that allow more output to be produced from existing resources.
The principal sources of long-run economic growth are increases in productive inputs and improvements in productivity. Labour contributes through the number of people working, hours worked and the skills of the workforce. Physical capital includes machinery, buildings, transport infrastructure, equipment and technological systems used in production. Human capital includes education, training, experience and health that increase workers' productive capacity. Natural resources can also contribute to production, although resource abundance does not automatically guarantee sustained growth.
Total factor productivity captures improvements in how efficiently labour and capital are combined, including technological progress, better management, improved organisational methods and institutional changes. In modern growth theory, sustained improvements in productivity are particularly important because simply adding more workers or physical capital faces diminishing returns.
Technological progress is a major driver of long-term growth because it can increase the amount of output produced from a given quantity of inputs. Innovations can involve entirely new products, more efficient production techniques, improved software, better logistics or new organisational methods. General-purpose technologies such as electricity, computing and digital communications can affect productivity across numerous industries rather than a single sector. Research and development can generate new knowledge, while education helps workers and firms absorb and apply existing technologies.
Innovation can also produce temporary disruption because new technologies can make some skills, products or business models less valuable. Nevertheless, technological improvement is central to sustained increases in productivity because it allows economies to expand output without requiring proportionate increases in labour and other scarce resources.
Investment contributes to growth by increasing productive capacity. Businesses invest in machinery, buildings, software, research and development and other capital assets when expected returns justify the expenditure. Governments can invest in roads, railways, electricity networks, schools, hospitals and digital infrastructure, which can raise the productivity of private activity as well as provide direct public services. Household investment in education and skills also contributes to human capital. The effectiveness of investment depends on its quality, maintenance and institutional environment. An economy can accumulate large quantities of physical capital without achieving high productivity if resources are poorly allocated or technologies are inappropriate. Investment also requires financing, meaning that financial systems play a role in transferring savings towards projects expected to generate future returns.
Population and labour-force changes affect economic growth in important ways. A growing working-age population can increase the potential quantity of labour available for production, while high employment rates allow a larger share of the population to participate in economic activity. However, population growth does not automatically raise living standards because total output must be considered relative to population. A rapidly growing population can produce higher total GDP while GDP per capita grows more slowly or declines.
Demographic ageing can reduce labour-force growth and increase demands on pensions, healthcare and social care, although older populations can also possess substantial accumulated wealth, experience and human capital. Migration can change the size, age structure and skills composition of the workforce. These demographic factors interact with productivity, employment and capital investment.
Economic growth is distinct from economic development, although the two concepts are closely related. Growth refers primarily to an increase in measured economic output, whereas development encompasses broader changes in living standards, capabilities, institutions, distribution and social conditions. Growth can help finance public services, increase household incomes and reduce poverty, but the benefits depend on distribution, employment patterns, taxation and the nature of production.
An economy can grow through activities that generate substantial environmental damage or inequality, meaning that growth does not automatically represent improvement across every dimension of wellbeing. Conversely, improvements in health or education may increase human capabilities without immediately producing a large measurable increase in GDP. The distinction is therefore important when evaluating economic change.
Economic growth has potential advantages and potential costs. Higher output can support rising employment, incomes, business investment and tax revenues, and can provide governments with greater resources for public services and infrastructure. Growth can also facilitate technological investment and reduce the economic burden of fixed costs when production expands. However, rapid expansion can generate inflationary pressure when demand exceeds productive capacity, increase environmental pressures, intensify resource consumption or create financial imbalances if supported by excessive borrowing.
The distribution of growth also matters because aggregate output can rise while particular households experience stagnant or falling real incomes. Growth may therefore create opportunities without ensuring that every group benefits equally. Economists analyse these effects using indicators including real GDP, productivity, real wages, employment, investment and sectoral output.
Long-run growth depends heavily on the institutional and technological environment in which economic activity occurs. Secure property rights, functioning financial systems, reliable infrastructure, effective education systems, competitive markets and predictable legal frameworks can support investment and innovation. Macroeconomic stability can reduce uncertainty surrounding inflation, interest rates and public finances, although the precise relationship between policy and growth depends on circumstances. International trade can expand markets and permit specialisation, while access to global knowledge and technology can increase productivity.
Economic shocks such as wars, pandemics, financial crises, energy disruptions and natural disasters can temporarily reduce output or permanently affect productive capacity. Economic growth is therefore not a mechanical process but the cumulative result of changes in labour, capital, technology, institutions, resources and economic conditions over time.
