Growth economics

Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP, usually in per capita terms.

Growth is usually calculated in real terms – i.e., inflation-adjusted terms – to eliminate the distorting effect of inflation on the price of goods produced. Measurement of economic growth uses national income accounting. Since economic growth is measured as the annual percent change of gross domestic product (GDP), it has all the advantages and drawbacks of that measure.

The "rate of economic growth" refers to the geometric annual rate of growth in GDP between the first and the last year over a period of time. Implicitly, this growth rate is the trend in the average level of GDP over the period, which implicitly ignores the fluctuations in the GDP around this trend.

An increase in economic growth caused by more efficient use of inputs (such as labor productivity, physical capital, energy or materials) is referred to as intensive growth. GDP growth caused only by increases in the amount of inputs available for use (increased population, new territory) is called extensive growth.

The economic growth rate is calculated from data on GDP estimated by countries´statistical agencies. The rate of growth of GDP/capita is calculated from data on GDP and people for the initial and final periods included in the analysis.

In national income accounting, per capita output can be calculated using the following factors: output per unit of labor input (labor productivity), hours worked (intensity), the percentage of the working age population actually working (participation rate) and the proportion of the working-age population to the total population (demography). "The rate of change of GDP/population is the sum of the rates of change of these four variables plus their cross products."

Increases in labor productivity (the ratio of the value of output to labor input) have historically been the most important source of real per capita economic growth. "In a famous estimate, MIT Professor Robert Solow concluded that technological progress has accounted for 80 percent of the long-term rise in U.S. per capita income, with increased investment in capital explaining only the remaining 20 percent."

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