Economic growth is an increase in the value of goods and services produced by a country. This increase can be measured in either nominal or real terms. The nominal measure includes changes in both the volume and prices of production, but economists typically talk about’real’ economic growth – increases in the actual amount of production compared to other points in time. For example, a parent staying home from work to take care of children or an aging relative does not contribute to GDP, but they might be contributing to real economic growth by raising the productivity of their employer who hires them.
There are several ways to generate economic growth, but the most important is increasing the availability of resources. Adding physical capital, such as better tools or more buildings, can allow people to produce more output per period. Technological improvements also often create economic growth by allowing workers to produce more with the same resources.
In order to increase the supply of resources, people must save and invest. This is a critical step, because the more someone saves and invests in productive assets, the faster the economy grows. For a country to have real economic growth, these investments must be used efficiently and well.
Governments can try to stimulate an economy by increasing spending or by using monetary policy (changing the interest rate to encourage more borrowing). However, most of these approaches are short-term and don’t add any new resources to the economy.