How to Measure Economic Growth

Economic growth is a central topic for economists and is of great interest to business leaders and public-sector officials. It is the best way to understand if the standard of living in a country is increasing or decreasing, and it is the most important measure of a nation’s overall wealth and wellbeing.

But understanding and measuring economic growth is challenging. For one thing, economic growth is not the same as the production of goods and services. In fact, the term is often used synonymously with production in general — a misnomer that sidesteps a key difficulty in economics. The measurement of economic growth must be restricted to a subset of all production: the production of economically relevant goods and services. The simplest way to do this is through the calculation of real gross domestic product (GDP), which includes all consumer spending, business investment, and government spending in a period.

In the short run, economic growth is driven by the accumulation of capital and labor, which raises productivity. But this is limited by the limits of existing resources, and it does not lead to higher living standards on its own. Sustainable long-run economic growth requires more advanced technologies that make better use of existing assets by increasing the output per unit of input. For example, a computer built today has many more capabilities than the computers of 10 years ago, even though the raw materials needed are relatively the same.

Governments can influence actual growth rates by reducing red tape and taxes, cutting interest rates, and making other changes that increase demand. But they can also increase potential growth by investing in education, research, and development. A McKinsey study finds that greater racial economic parity can boost economic growth and create opportunities to right historical wrongs.