Understanding economic growth is a crucial issue for elected officials and business leaders in all countries, especially in developing ones. It’s important because, if an economy is growing, it typically indicates that people and businesses are earning more, spending more, and feeling better off than before.
One of the most common ways to increase economic growth is to invest in building more capital assets—such as factories, roads, and other infrastructure. Another way is to improve technology, which allows us to get more output out of a given amount of labor and raw materials. This type of growth can be driven by many factors—savings and investment (capital), entrepreneurship, and research and development, for example. But a major factor is how well the economy’s institutions—laws, regulations, and customs that govern incentives and influence behavior—support or hinder economic growth.
The simplest way to measure economic growth is by looking at gross domestic product (GDP), which includes all the consumer, business, and government spending in a country over a period of time. Unlike other indicators such as unemployment or inflation, GDP accounts for all spending in the economy: a person’s personal consumption (C), investments by businesses and households (I), and net exports.
An economy’s performance is measured on a quarterly basis. As a result, there are often significant variations between quarters. This is because, for instance, a surge in imports may offset the effects of a strong job market or lower oil prices. However, overall trends in the economy are often more telling than quarterly data.