Growth is good — whether it’s the growth of your portfolio, your salary, or the number of people who have access to your product. And the same is true for the economy as a whole, which is measured by the amount of goods and services it produces. The most popular measure of economic growth is gross domestic product, or GDP.
GDP is a broad measure that includes all the goods and services produced in a country, including consumer spending, business investment, government spending, and net exports. It’s the most commonly used measure of a country’s economic health because it’s easy to calculate and compare across countries. It isn’t the only way to measure a country’s economic health, however. The World Bank, for example, also uses gross national income (which adds in the income of citizens who live abroad) to classify countries for analytical purposes and determine borrowing eligibility.
The most important driver of economic growth is household spending, which is determined by a variety of factors. If households expect to have more income in the future, they will increase their spending. Other drivers of economic growth include investments by businesses and governments in things like machinery, computers, and roads. Various theories have been advanced to explain the process of economic growth, from Clark’s “traditional society” and Rostow’s “take-off” society to more modern ones that focus on entrepreneurship and investment.
In the long term, the principle of compounding is the most important factor in determining economic growth. A 3 percent growth rate over 20 years leads to a 6 percent bigger economy than a 2 percent one. But that’s only if the growth rate persists over time.