Economic Growth

Economic growth is an increase in the production of goods and services over a specific period. To be most accurate, the measurement must remove the effects of inflation.

Learn why all countries want economic growth, how growth is measured, and which factors drive production. Economic growth is the increase in the value of an economy's goods and services, which creates more profit for businesses. As a result, stock prices rise. That gives companies capital to invest and hire more employees. As more jobs are created, incomes rise. Consumers have more money to buy additional products and services, and purchases drive higher growth. For this reason, all countries want positive economic growth. This makes economic growth the most-watched economic indicator.

Gross domestic product is the best way to measure economic growth because it takes into account the country's entire economic output. GDP includes all goods and services that businesses in the country produce for sale. It doesn't matter whether they are sold domestically or overseas. Most countries measure economic growth each quarter. The most accurate measurement of growth is real GDP which removes the effects of inflation. The GDP growth rate uses real GDP.

The World Bank uses gross national income instead of GDP to measure growth. It includes income sent back by citizens who are working overseas. It's a critical source of income for many emerging market countries like Mexico. Comparisons of GDP by country will understate the size of these countries' economies. GDP doesn't include unpaid services. It leaves out child care, unpaid volunteer work, or illegal black-market activities. It also doesn't count the environmental costs. For example, the price of plastic is cheap because it doesn't include the cost of disposal. As a result, GDP doesn't measure how these costs impact the well-being of society.

Similarly, societies only value what they measure. For example, Nordic countries rank high in the World Economic Forum's Global Competitiveness Report.  Their budgets focus on the drivers of economic growth which are world-class education, social programs, and a high standard of living. These factors create a skilled and motivated workforce. These countries have a high tax rate. But they use the revenues to invest in the long-term building blocks of economic growth. Riane Eisler's book, “The Real Wealth of Nations,” proposes changes to the U.S. economic system by giving value to activities at the individual, societal, and environmental levels. This economic policy contrasts with that of the United States. It uses debt to finance short-term growth through boosting consumer and military spending. That's because these activities do show up in GDP. 

Analysts watch economic growth to discover what stage of the business cycle the economy is in. The best phase is expansion. This is when the economy is growing in a sustainable fashion. If growth is too far beyond a healthy growth rate, it overheats.

The Balance