Economic Growth

Updated on April 4, 2024
Article bySusmita Pathak
Edited bySusmita Pathak
Reviewed byDheeraj Vaidya, CFA, FRM

Economic Growth Definition

Economic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period. Increased productivity translates to higher income, more consumption of goods, and improved quality of life across the country.

Factors like capital goodsCapital GoodsCapital goods are man-made assets used in the manufacturing process of a product. They are used to produce the final goods that people consume daily. They are one of the four factors of production- the other three being natural resources, labor, and more, labor force, technology improvement, and human capital increase production capacity. The improvement in market value adjusted for inflation takes precedence over the number of goods and services produced by a nation. Traditional metrics to quantify the growth of an economy are gross domestic productGross Domestic ProductGDP or gross domestic product refers to the sum of the total monetary value of all finished goods and services produced within the border limits of any country. GDP determines the economic health of a nation. GDP = C + I + G + NXread more (GDP) or gross national product (GNP) over time.

Economic Growth

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Key Takeaways

  • Economic growth means an increase in the aggregated production and inflation-adjusted market value of economic commodities and services in a given economy over a specific period. It reflects a percentage change in the gross domestic product (GDP) or gross national product (GNP).
  • Increased economic output depends on factors, such as capital goods, labor force, technological advancements, and human capital.
  • It is different from economic development in that the latter deals with the efficacy of measures used to balance an economy’s social, economic, and political framework.
  • Benefits of economic expansion include higher income, reduced poverty, better facilities, and improved quality of life.

Understanding Economic Growth

Economic growth is no longer limited to a country’s economic development. While increased financial activities reflect a gain in market value over time, economic expansion refers to a country’s social and economic progress. In a nutshell, it is a measure of increased production and inflation-adjusted market value of economic goods and services. It also takes into account the number of hours spent working to produce the desired output. The percentage change in GNP or GDP over a period is a standard metric for gauging the economic growth rate.

A country’s real GDP covers all commodities and services produced for domestic or international consumption. This increased economic output leads to higher employment and incomes, allowing consumers to spend more on luxuries in addition to the necessities of life. It ultimately results in a growing consumption and a more productive economy. Therefore, a nation must analyze factors of productionFactors Of ProductionFactors of production define resources used to produce or create finished goods and services, the sale and purchase of which keeps the market economy more and boost its production capacity to achieve economic expansion.

Economic Growth Factors

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The production capacity must improve as consumption of products and services increase. To achieve this, manufacturers employ better machinery and skilled workers. It aids in the production of more goods compared to the previously reported results. This rise in productivity contributes to economic expansion. The rate of inflationRate Of InflationThe rate of inflation formula helps understand how much the price of goods and services in an economy has increased in a year. It is calculated by dividing the difference between two Consumer Price Indexes(CPI) by previous CPI and multiplying it by more, however, rises in lockstep with the pace of GDP.

The price of goods also rises in tandem with increased productivity, resulting in a financial imbalance in an economy. As a result, a developed nation ensures that economic expansion is at least 2%, a relatively low figure even if inflation occurs.

Unlike in the past, economic progress is also determined by the quality of life in society. It means there will be no growth to measure if the populace of an economy is unsatisfied and unhappy.

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Determinants Of Economic Growth

The economy of a country benefits from increased consumption and financial activity. There are, however, several other factors that can spur economic expansion:

  1. Physical Capital Goods – Increasing the amount of physical capital, such as machinery, equipment, factories, etc., in an economy raises labor productivityLabor ProductivityLabour productivity is a concept used to measure the worker's efficiency as the output value produced by a worker per unit of time. By comparing the individual productivity with average, it can be identified whether a particular worker is underperforming or more.
  2. Technological Improvement – The increased adoption of sophisticated technology leads to efficient and cost-effective production. Furthermore, businesses can produce greater output with the same amount of physical capitalPhysical CapitalPhysical capital refers to tangible assets used to develop or build final goods and services. It is an essential element for most manufacturing processes. Unlike human capital, its value can diminish over time because of the continuous use of physical items, such as machines, equipment, vehicles, computers, buildings, etc., in production. read more.
  3. Labor Force – When all other factors remain constant, more workers participate in the productivity of economic goods and services.
  4. Human Capital – Providing skilled laborers with training or hiring experienced workers boosts their productivity.

Economic Growth Examples


Economic growth of China has remained prominent since 1978, resulting in an average annual increase of 10% in GDP. The government has been able to achieve this due to accelerated reforms and a growing worldwide footprint. China has successfully managed its economy over the last four decades, raising more than 800 million people out of poverty.

Besides improving its health, education, and commercial sectors, China has pushed its resource-intensive manufacturing by employing a lenient labor force. Even though the nation has achieved upper-middle-income status, it led to an unbalanced economic, social, and environmental structure.

Above all, China is the only country with positive economic development in 2020 amid the COVID-19 pandemic.


Despite many crises, including the COVID-19 phase, the United States has remained the economic force globally. According to the International Monetary Fund, the U.S. economy accounts for 20% of the global economy and has the sixth-largest per capita GDP.

Several banks failed after the Great Depression, but the government saved a few through a bailoutBailoutA bailout refers to the prolonged financial support offered by the government or other financially stable organization to a business in the form of equity, cash, or loan to help it overcome certain losses and stay afloat in the more program. Since then, the country has made tremendous progress in restoring employment rates and supporting other economic recovery procedures.

The technologically advanced services industry, efficient free marketFree MarketA free market refers to an economic system free from government interventions and controlled by privately owned more, business-friendly environment, and proper use of production variables have been the reasons behind the consistent U.S. economic growth.


The manufacturing industry, which accounts for a large portion of the UK’s GDP, is responsible for the country’s economic expansion. However, during the coronavirus pandemic in 2020, the country’s economy contracted by 9.8%.

The British economy experienced a dramatic downturn during the Great Depression, which resulted in a global recessionGlobal RecessionGlobal recession refers to a condition when the countries across the globe experience an economic downturn for an extended period. It is a form of synchronized economic downfall encountered by the various interrelated economies throughout the more. The UK is a significant trade partner with other members of the European Union and nations like the U.S. and Japan. Hence, it plays a crucial role in maintaining a balance in the global market economy.

Any multi-national venture wishing to enter the UK market frequently chooses the country as its European base. It allows the nation to reclaim and maintain its economic infrastructure. According to the Organization for Economic Co-operation and Development (OECD), the UK’s GDP will grow at the fastest rate in the world in 2021, with a 7.2% increase.

Economic Growth vs Economic Development

Economic growth and economic developmentEconomic Growth And Economic DevelopmentEconomic growth is a conservative term that refers to an increase in a country's actual output level as a result of increased resource quality. In comparison, economic development is a normative concept that signifies an increase in an individual's standard of living as well as self-esteem more are two concepts that are frequently used interchangeably. However, their meanings and scopes are vastly different. Here are a few notable distinctions:


Let us look at the benefits of economic expansion or growth:

Economic Growth Benefits

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  • Higher Income: Initiatives of the government to boost economic progress lead to higher income levels. Only when people earn well can they afford to purchase various products and services.
  • Reduced Poverty: As more individuals get employment and find a way to support themselves, they rise out of poverty and lead a satisfying life.
  • Better Facilities: With the increase in the employment rate and income level, the people in an economy can earn the best education and enhance skills to fit suitable job opportunities.
  • Improved Quality of Life: As every aspect of life improves, the quality of life automatically improves.

Frequently Asked Questions (FAQs)

What is economic growth?

Economic growth refers to a country’s social and economic advancement over time, as measured by the aggregated output and inflation-adjusted market value of economic commodities and services. Increased productivity equates to higher per capita income, more consumption of goods, and improved quality of life in an economy.

How is economic growth measured?

Economic growth defines an increase in production and the inflation-adjusted market value of economic goods and services. It also considers how many hours were spent working to achieve the desired output. A standard metric for assessing the economic growth rate is the percentage change in GNP or GDP over time.

Is economic growth sustainable?

No, the growth of an economy is not sustainable. It considers the market value and the level of consumption of economic goods and services, which might fluctuate over time.

This has been a Guide to Economic Growth & its definition. Here we discuss how economic growth works & its benefits along with examples of China, US & UK. You may also have a look at finance articles –