Economic growth is a great thing—whether it’s the increase in your retirement savings or the growth of your portfolio. But measuring growth at an entire economy’s level is much more difficult than simply knowing if you have more money in your checking account today than yesterday.
The broadest measure of the economy’s size is gross domestic product (GDP), which includes all consumption, investment, and government spending within a country in a given period of time. But GDP doesn’t capture everything that adds value to the economy, and it’s not a particularly accurate measure of the overall wealth of a nation.
There are two main methods of increasing economic output: growing the size of the labor force and improving productivity. Increasing the number of workers can increase economic output but only strong productivity gains can raise per capita income and GDP. There are a number of ways to improve productivity, including skills training, specialization, and increased access to raw materials and capital goods.
But a more fundamental element is changing the incentives that govern how the labor force is utilized. For example, families that stay home to care for children or aging relatives may not contribute to GDP but their sacrifices can enable more productive workers in the paid labor force. And governments that lower taxes, reduce bureaucracy and regulations, or eliminate discrimination can create the conditions for more productive labor. These changes can also lead to higher levels of prosperity while reducing inequality and environmental concerns, as evidenced by China’s remarkable GDP growth over the past 25 years.