Increasing the economic “stuff” that people produce – measured in terms of gross domestic product (GDP) – has been one of the top priorities for elected officials, both in advanced and developing countries, for over two centuries. But understanding how to achieve and sustain high growth rates remains a challenge for economists.
One way to generate growth is to increase labor force participation, which produces more economic output per worker. But the new workers must be productive enough to offset their own consumption, so that they are net producers of goods and services. It’s also important that they be able to be placed in jobs where their talents can be used most effectively and where complementary capital goods are available to realize their productive potential.
Another source of growth is increased technical efficiency, which increases the amount of output produced per unit of labour and capital. This occurs when workers improve their skills through training or experience, businesses invest more in machinery and software, and better technology allows different kinds of goods to be combined in novel ways. The rate of technical growth is highly dependent on the pace of savings and investment, but it can also be stimulated by lower interest rates, which make borrowing cheaper.
But there are limits to the extent to which growth can be generated by any of these methods. For example, the more we grow, the faster household consumption will rise, and this can cause inflation that makes it harder for people to save or invest. And even if we can continue to find ways to boost productivity, the aging of the population means that we’ll be generating growth much more slowly than during the post-World War II golden age and the late 1990s.
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