Economic growth is a fundamentally important concept that is the driving force behind higher standards of living over time. Whether that growth happens in the form of more money per person, more material abundance, or less economizing problem-solving, it is what allows people to meet their basic needs and desires.
The most common measure of economic growth is gross domestic product (GDP), which measures the market value of all goods and services produced in a country in one period. However, GDP is a market-oriented measure and not designed to capture the social welfare benefits of production. For example, a parent staying at home to care for children or an elderly family member does not contribute to GDP; but their labor is valuable to the household. In addition, investments such as building homes or offices, purchasing machinery, constructing roads, or undertaking research and development do not appear in GDP but do contribute to the economy’s growth.
Understanding economic growth requires an appreciation of the way that a nation’s system of institutions works through incentives. Whether someone decides to save, invest, go to college, start a new business, hire an additional worker, or develop a new idea, these choices depend on the incentives provided.
The global economy is facing some serious challenges. Increasingly, countries face high and rising interest rates, debt sustainability risks, and continuing geopolitical tensions that threaten the stability of financial markets and the flow of international investment. In addition, climate shocks are threatening decades of progress in poverty reduction and economic development for some of the world’s poorest countries.
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