Economic growth is the increase in the market value of the additional goods and services produced by an economy over a period. This increase is typically measured as a rise in the country’s gross domestic product (GDP).
The main sources of economic growth are growth in the size of the workforce and growth in labor productivity. Both can lead to increases in the overall GDP but only strong productivity growth can increase per capita GDP and income. Productivity growth allows people to achieve the same material standard of living without having to work harder or to work fewer hours in the paid labor force.
In the long run, increased productivity is driven by new ideas that allow workers to produce more output with the same inputs. This includes the invention of better machines or tools that can perform a given task more efficiently. It also includes the development of more efficient methods or practices, such as computerized tax filing.
Economic growth may be boosted by higher labor or capital productivity, but it can also be hampered by slower technological progress or a slowdown in a country’s ability to absorb foreign investment. Regulatory constraints and policy uncertainty can also slow growth.
This article explores the factors driving economic growth in a panel of the world’s 20 largest economies using a panel autoregressive distributed lag (ARDL) estimator of Pool Mean Group (PMG). One percent increases in energy use, trade, capital, labor, foreign direct investment and human capital index are shown to significantly increase economic growth.