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What is economic growth? And why is it so important?

The goods and services that we all need are not just there – they need to be produced – and growth means that their quality and quantity increase..

Good health, a place to live, access to education, nutrition, social connections, respect, peace, human rights, a healthy environment, and happiness. These are just some of the many aspects we care about in our lives.

At the heart of many of these aspects that we care about are needs for which we require particular goods and services . Think of those that are needed for the goals on the list above – the health services from nurses and doctors, the home you live in, or the teachers who provide education.

Poverty, prosperity, and growth are often measured in monetary terms, most commonly as people’s income. But while monetary measures have some important advantages, they have the big disadvantage that they are abstract. In the worst case, monetary measures – like GDP per capita – are so abstract that we forget what they are actually about: people’s access to goods and services.

The point of this text is to show why economic growth is important and how the abstract monetary measures tell us about the reality of people’s material living conditions around the world and throughout history:

  • In the first part, I want to explain what economic growth is and why it is so difficult to measure.
  • In the second part, I will discuss the advantages and disadvantages of several measures of growth, and you will find the latest data on several of these measures so that we can see what they tell us about how people’s material living conditions have changed.

What are these goods and services that I’m talking about?

Have a look around yourself right now. Many of the things you see are products that were produced by someone so that you can use them: the trousers you are wearing, the device you are reading this on, the electricity that powers it, the furniture around you, the toilet that is nearby, the sewage system it is connected to, the bus or car or bicycle you took to get where you are, the food you had this morning, the medications you will receive when you get sick, every window in your home, every shirt in your wardrobe, and every book on your shelf.

At some point in the past, many of these products were not available. The majority did not have access to the most basic goods and services they needed. A recent study on the history of global poverty estimates that just two centuries ago, roughly three-quarters of the world "could not afford a tiny space to live, food that would not induce malnutrition, and some minimum heating capacity.” 1

Let’s look at the history of the last item on that list above, books.

A few centuries ago, the only way to produce a book was for a scribe to copy it word-for-word by hand. Book production was a slow process; it took a scribe about eight months of daily work to produce a single copy of the Bible. 2

It was so laborious that only very few books were produced. The chart shows the estimates of historians. 3

But then, in the 15th century, the goldsmith Johannes Gutenberg combined the idea of movable letters with the mechanism that he knew from the wine presses in his hometown. He developed the printing press. Gutenberg developed a new production technology, and it changed things dramatically. Instead of spending months to produce one book, a worker was now able to produce several books a day.

As the printing press spread across Europe, book production soared. Books, which were previously only available to a tiny elite, became available to more and more people.

This is one example of how growth is possible and what economic growth is : an increase in the production of goods and services that people produce for each other.

term paper on economic growth

A list of goods and services that people produce for each other

Before we get to a more detailed definition of economic growth, it’s helpful to remind ourselves of the astonishingly wide range of goods and services that people produce. I think this is helpful because measures of economic output can easily become abstract. This abstraction means we easily lose the mental connection to the goods and services such measures actually talk about.

This list of goods and services isn’t meant as a definitive list, but it helped me to think about the relevance of poverty and growth: 4

At home: Light in your home at night; the sewage system; a shower; vacuum cleaner; fridge; heating; air conditioning; electricity; windows; a toilet – even a flush toilet; soap; a balcony or a garden; running water; warm water; cutlery and dishes; a hut – or even a warm apartment or house; an oven; sewing machine; a stove (that doesn’t poison you ); carpet; toilet paper; trash bags; music recordings or even online streaming of the world’s music and film; garbage collection; radio; television; a washing machine; 5 furniture; telephone; a comfortable bed, and a room for one’s own.

Food: The most fundamental need is to have enough food. For much of human history, a large share of people suffered from hunger , and millions still do .

But we also need to have a richer and more varied diet to get all of the nutrients we need. Unfortunately, billions still suffer from micronutrient deficiency .

Also, think of clean drinking water; reliable markets and stores with a wide range of available goods; food that rarely poisons you (pasteurized milk, for example); spices; tea and coffee; kitchen utensils and practical ingredients (from a bag of flour to canned soups or a yogurt); chocolate and sweets; fresh fruit and vegetables; bread; take-away food or the possibility to go to a restaurant; ways to protect your food from spoiling (from the cold chain that delivers the goods to the cellophane to wrap it with); wine or beer; fertilizer ( very important); and tractors to work the fields.

Knowledge: Education from primary up to university level; books; data that allows us to understand the world around us; newspapers; vocational training; kindergartens; and scientific knowledge to understand ourselves and the world around us.

Infrastructure: Public transportation with buses, subways, and trains; roads; paved roads; airplanes; bridges; financial services (including bank accounts, ATMs, and credit cards); cities; a network of competent workers that can help you to fix problems; postal services (that delivers fast); national parks; street cleaning; public swimming pools (even private pools); firefighters; parks; online shopping; weather forecasts; and a waste management system.

Tools and technologies: Pencils, ballpoint pens, and paper; lawnmowers; cars; car mechanics; bicycles; power tools like drills (even battery-powered ones); a watch; computers and laptops; smartphones (with GPS and a good camera); being able to stay in touch with distant friends or family members (or even visiting them); GPS; batteries; telephones and mobiles; video calls; WiFi; and the internet right here.

Social services: Caretakers for those who are disabled, sick, or elderly; protection from crime; non-profit organizations financed by the public, by donations or by philanthropies; insurance (against many different risks); and a legal system with judges and lawyers that implement the rule of law.

There is also a wide range of transfer payments, which in themselves are not services (they are transfers) but which become more affordable as a society becomes more prosperous: sick leave and disability benefits; unemployment benefits; and being able to help others with a regular donation of some of your income to an effective charity . 6

Life and free time : tents; travel and holidays; surfboards; skis; board games; hotels; playgrounds; children’s toys; courses to learn hobbies (from painting to musical instruments or courses on the environment around us); a football; pets; the cinema, theater or a music concert; clothes (even comfortable and good-looking ones that keep you warm and protect you from the rain); shoes (even shoes for different purposes); shoe repair; the contraceptive pill and the ability to choose if and when to have children; sports classes from rock climbing to pilates and yoga; cigarettes (not all goods that people produce for each other are good for them); 7 a musical instrument; a camera; and parties to celebrate life.

Health and staying well: Dentists; antibiotics; surgeries; anesthesia; mental health care from psychologists and psychiatrists; vaccines; public sewage; a haircut; a massage; midwives; ambulances; modern medicine; band-aids; pharmaceutical drugs; sanitary pads; toothbrushes; dental floss (some do floss); disinfectants; glasses; sunglasses; contact lenses; hearing aids; and hospitals – including very well-equipped, modern hospitals that offer CT scans, which include intensive care units and allow heart or brain surgery or organ transplants.

Specific needs and wishes: Most of the products listed above are generally helpful to people. But often, the goods and services that are most important to one individual are very specific.

As I’m writing this, I have a big cast on my left leg after I broke it. These days, I depend on products that I had no use for just three weeks ago. To move around, I need two long crutches, and to prevent thrombosis, I need to inject a blood thinner every day. After I broke my leg, I needed the service of nurses and doctors. They had to rely on a range of medical equipment, such as X-ray machines. To get back on my feet, I might need the service of physiotherapists.

We all have very specific needs or wishes for particular goods and services. Some needs arise from bad luck, like an injury. Others are due to a new phase in life – think of the specific goods and services you need when you have a baby or when you take care of an elderly person. And yet others are due to specific interests – think of the needs of a fisherman, or a pianist, or a painter.

All of these goods and services do not just magically appear. They need to be produced. At some point in the past, the production of most of them was zero, and even the most essential ones were extremely scarce. So, if you want to know what economic growth means for your life, look at the list above.

What is economic growth?

So, how can we define what economic growth is?

A definition that can be found in so many publications that I don’t know which one to quote is that economic growth is “an increase in the amount of goods and services produced per head of the population over a period of time.”

The definition in the Oxford Dictionary is almost identical: “Economic growth is the increase in the production of goods and services per head of population over a stated period of time”. And the definition in the Cambridge Dictionary is similar. It defines growth as “an increase in the economy of a country or an area, especially of the value of goods and services the country or area produces.”

In the following footnote, you find more definitions. Bringing these definitions together and taking into account the economic literature more broadly, I suggest the following definition: Economic growth is an increase in the quantity and quality of the economic goods and services that a society produces.

I prefer a definition that is slightly longer than most others. If you want a shorter definition, you can speak of ‘products’ rather than ‘goods and services’, and you can speak of ‘value’ rather than mentioning both the quantity and quality aspects separately.

The most important change in quantity is from zero to one when a new product becomes available. Many of the most important changes in history became possible when new goods and services were developed; think of antibiotics, vaccines, computers, or the telephone.

You find more thoughts on the definition of growth in the footnote. 8

What are economic goods and services?

Many definitions of economic growth simply speak of the production of ‘goods and services’ collectively. This sidesteps a key difficulty in its definition and measurement. Economic growth is not concerned with all goods and services but with a subset of them: economic goods and services.

In everything we do – even in our most mundane activities – we continuously ‘produce’ goods and services in some form. Early in the morning, once we’ve brushed our teeth and made ourselves toast, we have already produced one service and one good. Should we count the tooth-brushing and the toast-making towards the economic production of the country we live in? The question of where to draw the line isn’t easy to answer. But we have to draw the line somewhere. If we don’t, we end up with a concept of production that is so broad that it becomes meaningless; we’d produce a service with every breath we take and every time we scratch our nose.

The line that we have to draw to define the economic goods and services is called the ‘production boundary’. The sketch illustrates the idea. The production boundary defines those goods and services that we consider when we speak about economic growth.

term paper on economic growth

For a huge number of goods or services, there is no question that they are of the ‘economic’ type. But for some of them, it can be complicated to decide on which side of the production boundary they fall. One example is the question of whether the production of illegal goods should be included. Another is whether production within a household should be included – should we consider it as economic production if we grow tomatoes in our backyard and make soup from them? Different authors and different measurement frameworks have given different answers to these questions. 9

There are some characteristics that are helpful in deciding on which side of the boundary a particular product falls. 10 Economic goods and services are those that can be produced and that are scarce in relation to the demand for them. They stand in contrast to free goods, like sunlight, which are abundant, or those many important aspects in our lives that cannot be produced, like friendships. 11 Our everyday language has this right: we don’t refer to the sun or our friendships as a good or service that we ‘produce’.

An economic good or service is provided by people to each other as a solution to a problem they are faced with, and this means that they are considered useful by the person who demands it.

A last characteristic that helps decide whether you are looking at an economic product is “delegability”. An activity is considered to be production in an economic sense if it can be delegated to someone else. This would include many of the goods and services on that long list we considered earlier but would exclude your breathing, for example.

Because economic goods are scarce in relation to the demand for them, human effort is required to produce them. 12 A shorter way of defining growth is, therefore, to say that it is an increase in the production of those products that people produce for each other.

The majority of goods and services on that long list above are uncontroversially of the economic type – everything from the light bulbs and furniture in your home to the roads and bridges that connect your home with the rest of the world. They are scarce in relation to the demand for them and have to be produced by someone; their production is delegable, and they are considered useful by those who want them.

It’s worth recognizing that many of the difficulties in defining the production boundary arise from the effort to make measures of economic production as comparable as possible.

To give just one concrete example of the type of considerations that make the discussion about specific definitions so difficult, let’s look at how the production boundary is drawn in the housing sector.

Imagine two countries that are identical except for one aspect: home ownership. In Country A, everyone rents their homes, and the total sum of annual rent amounts to €2 billion per year. In Country B, everyone owns their own home, and no one pays rent. To provide housing is certainly an economic service, but if we only counted monetary transactions, then we would get the false impression that the value of goods and services in Country A is €2 billion higher than in Country B. To avoid such misjudgment, the production boundary includes the housing services that are provided without any monetary transactions. In National Accounts, statisticians take into account the “imputed rental value of owner-occupied housing” – those households who own their home get assigned an imputed rental value. In the imagined scenario, these imputed rents would amount to €2 billion in Country B so that the prosperity of people in these two countries would be judged to be identical.

It is the case more broadly that National Account figures (like GDP) do include important non-market goods and services that are not included in household survey measures of people’s income. GDP does not only include the housing services by owner-occupied housing but also the provision of most goods and services that are provided by the government or nonprofit institutions.

How can we measure economic growth?

Many discussions about economic growth are extraordinarily confusing. People often talk past one another.

I believe the key reason for this is that the discussion of what economic growth is gets muddled up with how it is measured .

While it is straightforward enough to define what growth is, measuring growth is very, very difficult.

In the worst cases, measures of growth are mixed up with a definition of growth. Growth is often measured as an increase in income or inflation-adjusted GDP per capita. But these measures are not the definition of it – just like life expectancy is a measure of population health but is certainly not the definition of population health.

To see how difficult it is to measure growth, take a moment to think about how you would measure it. How would you determine whether the quantity and quality of all economic goods and services produced by a society increased or decreased over time?

Finding a measure means that you have to find a way to express a huge amount of relevant information in a single metric. As the sketch shows, you have to first measure the quantity and quality of all the many, many goods and services that get produced and then find a way to aggregate all of these measurements into one summarizing metric. No matter what measure you propose for such a difficult task, there will always be problems and shortcomings in any proposal you might make.

In the following section, I will show four possible ways of measuring growth and present some data for each of them to see how they can inform us about the history of material living conditions.

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Measuring economic growth by tracking access to particular goods and services

One possible way to measure growth is to make a list of some specific products that people want and to see what share of the population has access to them.

We do this very often at Our World in Data . The chart here shows the share of the world population that has access to four basic resources. All of these statistics measure some particular aspect of economic growth.

You can switch this chart to any country in the world via the “Change country” option. You will find that, judged by this metric, some countries achieved rapid growth – like Indonesia – while others only saw very little growth, like Chad.

The advantage of measuring growth in this way is that it is concrete. It makes clear what exactly is growing, and it’s clear which particular goods and services people gain access to.

The downside is that it only captures a small part of economic growth. There are many other goods and services that people want in addition to water, electricity, sanitation, and cooking technology. 13

You could, of course, expand this approach of measuring growth to many more goods and services, but this is usually not done for both practical and ethical considerations:

One practical reason is that a list of all the products that people value would be extremely long. Keeping lists that track people’s access to all products would be a daunting task: hundreds of different toothbrushes, thousands of different dentists, hundreds of thousands of different dishes in different restaurants, and many millions of different books. 14 If you wanted to measure growth across all goods and services in this way, you’d soon employ half the country in the statistical office.

In practice, any attempt to measure growth as access to particular products, therefore, means that you look only at a relatively small number of very particular goods and services that statisticians or economists are interested in. This is problematic for ethical reasons. It should not be up to the statisticians or economists to determine which few products should be considered valuable.

You might have realized this problem already when you read my list at the beginning of this text. You might have disagreed with the things that I put on that list and thought that some other goods and services were missing. This is why it is important to track incomes and not just access to particular goods: measuring people’s income is a way of measuring the options that they have rather than the choices that they make. It respects people’s judgment to decide for themselves what they find most important for their lives.

On our site, you find many more such metrics of growth that capture whether people have access to particular goods and services:

  • This chart shows the share of US households having access to specific technologies.
  • This chart shows the share that has health insurance.
  • This chart shows access to schools.

Measuring economic growth by tracking the ratio between people’s income and the prices of particular goods and services

To measure the options that a person’s income represents, we have to compare their income with the prices of the goods and services that they want. We have to look at the ratio between income and prices.

The chart here does this for one particular product – books – and brings us back to the history of growth in the publishing sector that we started with. 15 Shown is the ratio between the average income that a worker receives and the price of a book. It shows how long the average worker had to work to buy one book. Note that this data is plotted on a logarithmic axis.

Before the invention of the printing press in the 15th century, the price was often as high as several months of work. The fact that books were unaffordable for almost everyone should not be surprising. It corresponds to what we’ve seen earlier that it took a scribe several months to produce a single book.

The chart also shows how this changed when the printing press increased the productivity of publishing. As the labor required to produce a book declined from many months of work to less than a day, the price fell from months of wages to mere hours.

This shows us how an innovation in technology raises productivity and how an increase in production makes it more affordable. How it increases the options that people have.

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Global inequality: How do incomes compare in countries around the world?

In the previous section, we measured growth as the ratio between income and the price of one particular good. But of course, we could do the same for all the many goods and services that people want. This ratio – the ratio between the nominal income that people receive and the prices that people have to pay for goods and services – is called ‘real income’ . 16

Real income = Nominal income / price of goods and services

Real income grows when people’s nominal income increases or when the prices of goods and services decrease.

In contrast to many of the other metrics on Our World in Data, a person’s real income does not matter for its own sake but because it is a means to an end. A means to many ends, in fact.

Economic growth – measured as an increase in people’s real income – means that the ratio between people’s income and the prices of what they can buy is increasing: goods and services become more affordable, and people become less poor. It is because a person has more choices as their income grows that economists care so much about these monetary measures of prosperity.

The two most prominent measures of real income are GDP per capita and people’s incomes, as determined through household surveys.

They are shown in this chart.

Before we get back to the question of economic growth, let’s see what these measures of real income tell us about the economic inequality in the world today.

Both measures show that global inequality is very large. In a rich country like Denmark, an average person can purchase goods and services for $54 a day, while the average Ethiopian can only afford goods and services that cost $3 per day.

Both measures of real incomes in this chart are measured in international dollars, which means that they take into account the level of prices in each country (using purchasing power parity conversion factors). This price adjustment is done in such a way that one international-$ is equivalent to the purchasing power of one US-$ in the US . An income of int.-$3 in Ethiopia, for example, means that it allows you to purchase goods and services in Ethiopia that would cost US-$3 in the US . All dollar values in this text are given in international dollars, even though I often shorten it to just the $-sign.

If you are living in a rich country and you want to have a sense of what it means to live in a poor country – where incomes are 20 times lower – you can imagine that the prices for everything around you suddenly increase 20-fold. 17 If all the things you buy suddenly get 20-times more expensive your real income is 20-times lower. A loaf of bread doesn’t cost $2 but $40, a pair of jeans costs $400, and an old car costs $40,000. If you ask yourself how these price increases would change your daily consumption and your day-to-day life, you can get a sense of what it means to live in a poor country.

The two shown measures of real income differ:

  • The data on the vertical axis is based on surveys in which researchers go from house to house and ask people about their economic situation. In some countries, people are asked about their income, while in other countries, people are asked about their expenditure – expenditure is income minus savings. In poor countries, these two measures are close to each other since poor people do not have the chance to save much.
  • On the other hand, GDP per capita starts at the aggregate level and divides the income of the entire economy by the number of people in that country. GDP per capita is higher than per capita survey income because GDP is a more comprehensive measure of income. As we’ve discussed before, it includes an imputed rental value of owner-occupied housing and other differences, such as government expenditure.

Income as a measure of economic prosperity is much more abstract than the metrics we looked at previously. The comparison of incomes of people around the world in this scatterplot measures options, not choices. It shows us that the economic options for billions of people are very low. The majority of the world lives on very low incomes of less than $20, $10, or even $5 per day. In the next section, we’ll see how poverty has changed over time.

  • GDP per capita vs. Daily income of the poorest 10%
  • GDP per capita vs. Daily average income

Global poverty and growth: How have incomes changed around the world?

Economic growth, as we said before, is an increase in the production of the quantity and quality of the economic goods and services that a society produces. The total income in a society corresponds to the total sum of goods and services the society produces – everyone’s spending is someone else’s income. This means that the average income corresponds to the level of average production, so that the average income in a society increases when the production of goods and services increases.

Average production = average income

In this final section, let’s see how incomes have changed over time, first as documented in survey incomes and then via GDP per capita.

Measuring economic growth by tracking incomes as reported in household surveys

The chart shows the income of people around the world over time, as reported in household surveys. It shows the share of the world population that lives below different poverty lines: from extremely low poverty lines up to $30 per day, which corresponds to notions of poverty in high-income countries .

Many of the poorest people in the world rely on subsistence farming and do not have a monetary income. To take this into account and make a fair comparison of their living standards, the statisticians who produce these figures estimate the monetary value of their home production and add it to their income.

Again, the prices of goods and services are taken into account: these are measures of real incomes. As explained before, incomes are adjusted for price differences between countries, and they are also adjusted for inflation. As a consequence of these two adjustments, incomes are expressed in international dollars in 2017 prices, which means that these income measures express what you would have been able to buy with US dollars in the US in 201 7.

Global economic growth can be seen in this chart as an increasing share of the population living on higher incomes. In 2000 two thirds of the world lived on less than $6.85 per day. In the following 19 years, this share fell by 22 percentage points.

In 2020 and 2021 — during the economic recession that followed the pandemic — the size of the world economy declined, and the share of people in poverty increased . As soon as global data for this period is available, we will update this chart.

The data shows that global poverty has declined, no matter what poverty line you choose. It also shows that the majority of the world still lives on very low incomes. As we’ve seen, we can describe the same reality from the production side: the global production of the goods and services that people want has increased, but there is still not enough production of even very basic products. Most people in the world do not have access to them.

An advantage of household survey data over GDP per capita is that it captures the inequality of incomes within a country. You can explore this inequality with this chart by switching to see the data for an individual country via the ‘Change country’ button.

Measuring economic growth by tracking GDP per capita

GDP per capita is a broader measure of real income, and in contrast to survey income, it also takes government expenditures into account. A lot of thinking has gone into the construction of this very prominent metric so that it is comparable not only over time but also across countries. This makes it especially useful as a measure to understand the economic inequality in the world, as we’ve seen above. 18

Another advantage of this measure is that historians have reconstructed estimates of GDP per capita that go back many centuries. This historical research is an extremely laborious task , and researchers have dedicated many years of work to these reconstructions. The ‘Maddison Project’ brings together these long-run reconstructions from various researchers, and thanks to these efforts, we have a good understanding of how incomes have changed over time.

The chart shows how average incomes in different world regions have changed over the last two centuries. Looking at the latest data, you see again the very large inequality between different parts of the world today. You now also see the history of how we got here: small increases in production in some world regions and very large increases in those regions where people have the highest incomes today.

One of the very first countries to achieve sustained economic growth was the United Kingdom. In this chart, we see the reconstructions of GDP per capita in the UK over the last centuries.

It is no accident that the shape of this chart is very similar to the chart on book production at the beginning of this text – very low and almost flat for many generations and then quickly rising. Both of these developments are driven by changes in production.

Average income corresponds to average production, and societies around the world were able to produce very few goods and services in the past. There were no major exceptions to this reality. As we see in this chart, global inequality was much lower than today: the majority of people around the world were very poor.

To get a sense of what this means, you can again take the approach we’ve used to understand the inequality in the world today. When incomes in today’s rich countries were 20 times lower, it was as if all the prices around you today would suddenly increase 20-fold. But in addition to this, you have to consider that all the goods and services that were developed since then disappeared – no bicycle, no internet, no antibiotics. All that’s left for you are the goods and services of the 17th century, but all of them are 20 times more expensive than today. The majority of people around the world, including in today’s richest countries, live in deep poverty.

Just as we’ve seen in the history of book production, this changed once new production technologies were introduced. The printing press was an exceptionally early innovation in production technology; most innovations happened in the last 250 years. The starting point of this rise out of poverty is called the Industrial Revolution.

The printing press made it possible to produce more books. The many innovations that made up the Industrial Revolution made it possible to increase the production of many goods and services. Compare the effort that it takes for a farmer to reap corn with a scythe to the possibilities of a farmer with a tractor or a combined harvester, or think of the technologies that made overland travel faster – from walking on foot to traveling in a horse buggy to taking the train or car; or think of the effort it took to build those roads that the buggies once traveled on with the modern machinery that allows us to produce the corresponding public infrastructure today .

The production of a myriad of different goods and services followed trajectories very similar to the production of books – flat and low in the past and then steeply increasing. The rise in average income that we see in this chart is the result of the aggregation of all these production increases.

In the past, before societies achieved economic growth, the only way for anyone to become richer was for someone else to become poorer; the economy was a zero-sum game. In a society that achieves economic growth, this is no longer the case. When average incomes increase, it becomes possible for people to become richer without someone else becoming poorer.

This transition from a zero-sum to a positive-sum economy is the most important change in economic history (I wrote about it here ) and made it possible for entire societies to leave the extreme poverty of the past behind.

Conclusion: The history of global poverty reduction has just begun

The chart shows the global history of extreme poverty and economic growth.

In the top left panel, you can see how global poverty has declined as incomes increased; in the other eight panels, you see the same for all world regions separately. The starting point of each trajectory shows the data for 1820 and tells us that two centuries ago, the majority of people lived in extreme poverty, no matter where in the world they were at home.

Back then, it was widely believed that widespread poverty was inevitable. But this turned out to be wrong. The trajectories show how incomes and poverty have changed in each world region. All regions achieved growth – the goods and services that people need saw their production and quality increase – and the share living in extreme poverty declined. 19

This historical research was done by Michail Moatsos and is based on the ‘cost of basic needs’-approach as suggested by Robert Allen (2017) and recommended by the late Tony Atkinson. 20 The name ‘extreme poverty’ is appropriate as this measure is based on an extremely low poverty threshold. It takes us back to what I mentioned at the very beginning; this historical research tells us – as the author puts it – that three-quarters of the world "could not afford a tiny space to live, food that would not induce malnutrition, and some minimum heating capacity.”

Since then, all world regions have made progress against extreme poverty – some much earlier than others – but in particular, in Sub-Saharan Africa, the share of people living in deep poverty is still very high.

term paper on economic growth

The last two centuries were the first time in human history that societies have achieved sustained economic growth, and the decline of global poverty is one of the most important achievements in history. But it is still a very long way to go.

This is what we see in this final chart. The red line shows the share of people living in extreme poverty that we just discussed. Additionally, you now also see the share living on less than $3.65, $6.85, and $30 per day. 21

The world today is very unequal, and the majority of the world still lives in poverty: 47% live on less than $6.85 per day, and 84% live on less than $30. Even after two centuries of progress, we are still in the early stages. The history of global poverty reduction has only just begun.

That the world has made substantial progress but nevertheless still has a long way to go is the case for many of the world’s very large problems. I’ve written before that all three statements are true at the same time: The world is much better, the world is awful, and the world can be much better. This is very much the case for global poverty. The world is much less poor than in the past, but it is still very poor, and it remains one of the largest problems we face.

Some writers suggest we can end poverty by simply reducing global inequality. This is not the case. I’m very much in favor of reducing global inequality, and I hope I do what I can to contribute to this. But it is important to be clear that a reduction of inequality alone would still mean that billions around the world would live in very poor conditions. Those who don’t see the importance of growth are not aware of the extent of global poverty. The production of many crucial goods and services has to increase if we want to end it. How much economic growth is needed to achieve this? This is the question I answered in this recent text .

To solve the problems we face, it is not enough to increase overall production. We also need to make good decisions about which goods and services we want to produce more of and which ones we want less of. Growth doesn’t just have a rate, it also has a direction, and the direction we choose matters – for our own happiness and for achieving a sustainable future .

I hope this text was helpful in making clear what economic growth is. It is necessary to remind ourselves of that because we mostly talk about poverty and growth in monetary terms. The monetary measures have the disadvantage that they are abstract, perhaps so abstract that we even forget what growth is actually about and why it is so important. The goods and services that we all need are not just there – they need to be produced – and economic growth means that the quality and quantity of these goods and services increase, from the food that we eat to the public infrastructure we rely on.

The history of economic growth is the history of how societies leave widespread poverty behind by finding ways to produce more of the goods and services that people need – all the very many goods and services that people produce for each other: look around you now.

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Acknowledgments: I would like to thank Joe Hasell and Hannah Ritchie for very helpful comments on draft versions of this article.

Our World in Data presents the data and research to make progress against the world’s largest problems. This article draws on data and research discussed in our topic pages on Economic Inequality , Global Poverty , and Economic Growth .

Version history: In October 2023, I copy-edited this article; it was a minor update, and nothing substantial was changed.

Michail Moatsos (2021) – Global extreme poverty: Present and past since 1820. Published in OECD (2021), How Was Life? Volume II: New Perspectives on Well-being and Global Inequality since 1820 , OECD Publishing, Paris, https://doi.org/10.1787/3d96efc5-en .

At the time when material prosperity was so poor, living conditions were extremely poor in general; close to half of all children died .

Historian Gregory Clark reports the estimate that scribes were able to copy about 3,000 words of plain text per day.

See Clark (2007) – A Farewell to Alms: A Brief Economic History of the World. Clark (2007). In it, Clark quotes his earlier working paper with Patricia Levin as the source of these estimates. Gregory Clark and Patricia Levin (2001) – “How Different Was the Industrial Revolution? The Revolution in Printing, 1350–1869.”

There are about 760,000 words in the bible (it differs between various translations and languages; here is an overview of some translations).

This implies that the production of one copy of the Bible meant 253.3 days (8.3 months) of daily work.

Copying the text was not the only step in the production process for which productivity was low. The ink had to be made, parchment had to be produced and cut, and many other steps involved laborious work.

Wikipedia’s article about scribes reports sources that estimate that the production time per bible was even longer than 8 months.

Clark himself states in the same publication that “Prior to that innovation, books had to be copied by hand, with copyists on works with just plain text still only able to copy 3,000 words per day. Producing one copy of the Bible at this rate would take 136 man-days.” Since the product of 136 and 3000 is only 408,000, it is unclear to me how Clark has arrived at this estimate – 408,000 words are fewer words than in the Tanakh and other versions of the bible.

The data is taken from Eltjo Buringh and Jan Luiten Van Zanden (2009) – Charting the “Rise of the West”: Manuscripts and Printed Books in Europe, a Long-Term Perspective from the Sixth through Eighteenth Centuries. In The Journal of Economic History Vol. 69, No. 2 (June 2009), pp. 409-445. Online here .

Western Europe in this study is the area of today’s Great Britain, Ireland, France, Belgium, Netherlands, Germany, Switzerland, Italy, Spain, Sweden, and Poland.

On the history and economics of book production, see also the historical work of Jeremiah Dittmar.

I’ve relied on several sources to produce this list. One source was the simple descriptions of the consumption bundles that are relied upon for CPI measurement – like this one from Germany’s statistical office . And I have also relied on the national accounts themselves.

This list is also inspired partly by this list of Gwern and I’m also grateful for the feedback that I got via Twitter to earlier versions of this list. [ Here I shared the list on Twitter ]

This is Hans Rosling’s talk on the magic of the washing machine – worth watching if you haven’t seen it.

Of course all of these transfer payments have a service component to them, someone is managing the payment of the disability benefits etc.

Because smoking causes a large amount of suffering and death I do not find cigarettes valuable, but my opinion is not what matters for a list of goods and services that people produce for each other. Whether some good is considered to be part of the domestic product depends on whether it is a good that some people want, not whether you or I want it. More on this below.

Very similar to the definitions given above is the definition that Kimberly Amadeo gives: “Economic growth is an increase in the production of goods and services over a specific period.”

“Economic growth is an increase in the production of economic goods and services, compared from one period of time to another” is the definition at Investopedia .

Alternatively, to my definition, I think it can be useful to think of economic growth as not directly concerned with the output as such but with the capacity to produce this output. The NASDAQ’s glossary defines growth in that way: “An increase in the nation's capacity to produce goods and services.”

Wikipedia defines economic growth as follows: “Economic growth can be defined as the increase in the inflation-adjusted market value of the goods and services produced by an economy over time.” Definitions that are based on how growth is measured strike me as wrong – just like life expectancy is a measure of population health and hardly the definition of population health. I will get back to this mistake further below in this text.

An aspect that I emphasize more explicitly than others is the quality of the goods and services. People obviously do just care about the number of goods, and in the literature on growth, the measurement of changes in quality is a central question. Many definitions speak more broadly about the ‘value’ of the goods and services that are produced, but I think it is worth emphasizing that growth is also concerned with a rise in the quality of goods and services.

OECD – Measuring the Non-Observed Economy: A Handbook .

The relevant numbers are not small. For the US alone, “illegal drugs add $108 billion to measured nominal GDP in 2017, illegal prostitution adds $10 billion, illegal gambling adds $4 billion, and theft from businesses adds $109 billion” if they were to be included in the US National Accounts. This is according to the report by Rachel Soloveichik (2019) – Including Illegal Activity in the U.S. National Economic Accounts . Published by the BEA.

Ironmonger (2001) – Household Production. In International Encyclopedia of the Social & Behavioral Sciences. Pages 6934-6939. https://doi.org/10.1016/B0-08-043076-7/03964-4

Or for some longer run data on the US: Danit Kanal and Joseph Ted Kornegay (2019) – Accounting for Household Production in the National Accounts: An Update, 1965–2017 . In the Survey of Current Business.

Helpful references that discuss how the production boundary is drawn (and how it changed over time) are: Lequiller and Blades – Understanding National Accounts (available in various editions) Diane Coyle (2016) – GDP: A Brief but Affectionate History https://press.princeton.edu/books/paperback/9780691169859/gdp

The definition of the production boundary by Statistics Finland

Itsuo Sakuma (2013) – The Production Boundary Reconsidered. In The Review of Income and Wealth. Volume 59, Issue 3; Pages 556-567.

Diane Coyle (2017) – Do-it-Yourself Digital: The Production Boundary and the Productivity Puzzle. ESCoE Discussion Paper 2017-01, Available at SSRN: http://dx.doi.org/10.2139/ssrn.2986725

A more general way of thinking about free goods and services is to consider them as those for which the supply is hugely greater than the demand.

Their production, therefore, has an opportunity cost, which means that if someone obtains an economic good, someone is giving up on something for it – this can either be the person themselves or society more broadly. Free goods, in contrast, are provided with zero opportunity cost to society.

It is also the case that the international statistics on these measures often have very low cutoffs for what it means ‘to have access’; this is, for example, the case for what it means to have access to energy.

10 years ago, Google counted there were 129,864,880 different books, and since then, the number has increased further by many thousands of new books every day.

This chart is from Jeremiah Dittmar and Skipper Seabold (2019) – New Media New Knowledge – How the printing press led to a transformation of European thought . I was unfortunately not able to find the raw data anywhere and could not redraw this chart; if someone knows where this (or comparable) data can be found, please let me know.

In the language of economists, the nominal value is measured in terms of money, whereas the real value is measured against goods or services. This means that the real income is the income adjusted for inflation (it is adjusted for the changes in prices of goods and services). Thereby, it allows comparisons that tell us the quantity and quality of the goods and services that people were able to purchase at different points in time.

I learned this way of thinking about it from Twitter user @Kirsten3531, who responded with this idea to a tweet of mine here https://twitter.com/Kirsten3531/status/1389553625308045317

We’ve discussed one such consideration that is crucial for comparability when we consider how to take into account the value of owner-occupied housing.

Whether economic growth translates into the reduction of poverty depends not only on the growth itself but also on how the distribution of income changes. The poverty metrics shown in this chart and in previous charts take both of these aspects – the average level of production/income and its distribution – into account.

Jutta Bolt and Jan Luiten van Zanden (2021) – The GDP data in the chart is taken from The Long View on Economic Growth: New Estimates of GDP, How Was Life? Volume II: New Perspectives on Well-being and Global Inequality since 1820 , OECD Publishing, Paris, https://doi.org/10.1787/3d96efc5-en .

The latest data point for the poverty data refers to 2018, while the latest data point for GDP per capita refers to 2016. In the chart, I have chosen the middle year (2017) as the reference year.

The ‘cost of basic needs’-approach was recommended by the ‘World Bank Commission on Global Poverty’, headed by Tony Atkinson, as a complementary method in measuring poverty.

The report for the ‘World Bank Commission on Global Poverty’ can be found here .

Tony Atkinson – and, after his death, his colleagues – turned this report into a book that was published as Anthony B. Atkinson (2019) – Measuring Poverty Around the World. You find more information on Atkinson’s website .

The CBN-approach Moatsos’ work is based on what was suggested by Allen in Robert Allen (2017) – Absolute poverty: When necessity displaces desire. In American Economic Review, Vol. 107/12, pp. 3690-3721, https://doi.org/10.1257/aer.20161080 .

Moatsos describes the methodology as follows: “In this approach, poverty lines are calculated for every year and country separately, rather than using a single global line. The second step is to gather the necessary data to operationalize this approach alongside imputation methods in cases where not all the necessary data are available. The third step is to devise a method for aggregating countries’ poverty estimates on a global scale to account for countries that lack some of the relevant data.” In his publication – linked above – you find much more detail on all of the shown poverty data. The speed at which extreme poverty declined increased over time, as the chart shows. Moatsos writes, “It took 136 years from 1820 for our global poverty rate to fall under 50%, then another 45 years to cut this rate in half again by 2001. In the early 21st century, global poverty reduction accelerated, and in 13 years, our global measure of extreme poverty was halved again by 2014.”

These are the same global poverty estimates – based on household surveys – we discussed above.

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The Outlook for Long-Term Economic Growth

What are the prospects for economic growth in the United States and other advanced countries over the next several decades? U.S. growth for the past 150 years has been surprisingly stable at 2% per year. Growth theory reveals that in the long run, growth in living standards is determined by growth in the worldwide number of people searching for ideas. At the same time, a growth accounting exercise for the United States since the 1950s suggests that many other factors have temporarily contributed to growth, including rising educational attainment and a rising investment rate in ideas. But these forces are inherently temporary, implying that growth rates could slow in the future. This prediction is reinforced by declining population growth throughout the world. In contrast, other forces could potentially sustain or even increase growth. The emergence of countries such as China and India provides large numbers of people who could search for ideas. Improvements in the allocation of talent --- for example, the rise of women inventors --- and increased automation through artificial intelligence are other potential tailwinds.

Prepared for the August 2023 Jackson Hole Symposium panel on “Globalization at an Inflection Point.” This paper summarizes work reported in Jones (2022). The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.

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Globalization, or the increased interconnectedness and interdependence of peoples, companies, institutions and countries. It is generally understood to include two inter-related elements: the opening of international borders to increasingly fast flows of goods, services, finance, investment, people, information, ideas and technology; and the changes in institutions and policies at national and international levels that facilitate or promote such flows (WHO 2020 ). Globalization process has impacts on economies, prosperity, development of societies, political systems, environment, and cultures around the world.

Economic globalization can be defined as the increasing interdependence of world economies as a result of the growing scale of cross-border trade of commodities and services, flow of international capital and wide and rapid spread of technologies. It reflects the continuing expansion and mutual...

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Demir, I., Canakci, M., Egri, T. (2021). Globalization and Economic Growth. In: Leal Filho, W., Azul, A.M., Brandli, L., Lange Salvia, A., Wall, T. (eds) Decent Work and Economic Growth. Encyclopedia of the UN Sustainable Development Goals. Springer, Cham. https://doi.org/10.1007/978-3-319-71058-7_90-1

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Importance of economic growth, why economic growth is important.

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  • Reduction in poverty . Increased national output means households can enjoy more goods and services. For countries with significant levels of poverty, economic growth can enable vastly improved living standards. For example, in the nineteenth century, absolute poverty was widespread in Europe, a century of economic growth has lifted nearly everyone out of this state of poverty. Economic growth is particularly important in developing economies.
  • Reduced Unemployment . A stagnant economy leads to higher rates of unemployment and the consequent social misery. Economic growth leads to higher demand and firms are likely to increase employment.
  • Improved public services . Higher economic growth leads to higher tax revenues (even with tax rates staying the same). With higher growth, incomes and profit, the government will receive more income tax, corporation tax and expenditure taxes. The government can then spend more on public services. 

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  • Political aspect . Elected politicians have a vested interest in higher economic growth. Higher growth enables vote pleasing policies such as tax cuts and/or more public spending.

Virtuous cycle of economic growth

  • Countries with positive rates of economic growth will create a virtuous cycle
  • Economic growth will encourage inward investment as firms seek to benefit from rising demand
  • Higher growth leads to improved tax revenues which can be spent on long-term public sector works, such as improved transport and communication. This helps long-term growth.
  • Confidence to invest. Higher growth encourages firms to take risks - innovate and invest in future products and productive capacity.

Limitations of economic growth

  • Inequality and distribution . Economic growth doesn't necessarily reduce relative poverty, it depends on the distribution of incomes. Economic growth could bypass the poorest in society. For example in the 1980s, the Gini coefficient rose sharply - the richest 1% gained dis proportionality more.
  • Negative externalities . Economic growth can cause negative externalities such as pollution, higher crime rates and congestion which actually reduce living standards. For example, China has experienced very rapid economic growth but is now experience very serious levels of air pollution in major cities.
  • Economic growth may conflict with the environment . e.g. increased carbon production is leading to global warming. Economic growth may bring benefits in the short-term, but costs in the long-term.
  • It depends on what is produced . The Soviet Union has fantastic rates of economic growth, but, often through producing a lot of steel and pig iron that was not actually very useful.
  • Economic growth can be unsustainable . If growth is too rapid, it will cause inflation, current account deficit and can lead to boom and bust.
  • Does happiness actually increase? Theories of hedonistic relativism suggest (beyond a certain level) increasing output has no effect on changing life quality or happiness.
  • Causes of Economic Growth
  • Benefits of economic growth
  • The Importance of Economics

3 comments:

No one is explaining clearly WHY the UK deficit has got so much worse so suddenly in 2009. What items are (roughly) responsible for each part of the increase?

term paper on economic growth

2008 Financial Crisis, read the following: https://www.ifs.org.uk/publications/13302

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Are the answers the same with why economists take much attention to economic growth matters

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What are the Challenges of Economic Growth?

By Ricardo Hausmann (originally published in GrowthPolicy )

The challenges of economic growth are very different in different countries. The U.S. and Europe face a certain set of issues that look very different from the issues faced in China or India, or the issues faced in the Americas or in Sub-Saharan Africa.

It would not be wise to cover all regions of the world with the same brush. There is a subset of countries in the developing world that are growing faster than the rest and are tending to converge towards the developed world, such as China, India, Thailand, and Vietnam. These countries are poised for growth, so you could say “the check is in the mail.” They just need to keep the growth process going and they face a certain set of challenges in doing so.

By contrast, in Latin America and Sub-Saharan Africa, countries just ended a very successful decade of economic growth that was propelled by high commodity prices and cheap access to capital. Right now, growth in these regions has slowed down enormously and creating a more dynamic environment going forward looks much more challenging, because they lack non-resource dynamic export industries that can generate the dynamism that the resource sector no longer can.

So my question would be, “Why does Asia look more promising than the Americas and Sub-Saharan Africa?”

In the economic growth process, countries in the developing world do not grow by making more of the same . In fact, more of the same is not the way rich countries grow either. In the process of economic growth, countries change what they do. They change what they’re good at. They evolve their comparative advantage. So while Israel used to export oranges, now they export IPOs of high-tech firms. Turkey used to export olive oil. Now they export cars and electronics. They do this because they acquire new productive capabilities ; they acquire know-how and technology that allows them to do more diverse and valuable things.

Some industries are better stepping-stones than other industries for this process. So if a country is good at producing tea or at oil extraction, these industries don’t naturally prepare it for the next thing. But there’s a much more parsimonious path if you’re moving from garments, to textiles, to toys, to electronics, and to cars, because each new industry can build on the capabilities that were acquired for the previous industry.

To analyze which industries are ripe for the next phase of growth in a country we look at how technologically close are those industries to the ones the country already has. We have measured the relatedness of all pairs of exported products and we can look at what products a country is already good at and what are the most related products that they have yet to develop. This has already been automated in an online tool we call the Atlas of Economic Complexity . There you can explore any country and any industry. It is this tool that lets me say that the opportunities for further diversification into more complex products are greater in India, Thailand, Indonesia, Vietnam, Mexico and China than in most of South America or Sub-Saharan Africa.

For countries in South America and Sub-Saharan Africa, the industries in which they excel are often lousy stepping-stones for further diversification, meaning that, they require capabilities that are not easily redeployed towards other industries. For these countries, the challenge is more significant. They need policies that more consciously address the chicken and egg problems that always bedevil the diversification process.

New activities always face this chicken-and-egg problem . A country cannot make watches if it doesn’t have watchmakers. But you don’t want to become a watchmaker in a country that doesn’t make watches. Even if you wanted to become a watchmaker, you wouldn’t have other watchmakers to learn from because nobody is making watches. This requires a government that can play a smart “coordinator” role, which most governments are not set up to do.

So I believe that growth policies need to be focused on identifying new diversification opportunities and having an activist government trying to solve the coordination failures that these face. It is not about substituting for the market but to solve the market failures associated with chicken-and-egg problems that are ubiquitous in this area. The jobs of the future will be in these new industries directly and in the multiplier effect in the rest of the economy that these industries will have by demanding inputs from others or through the local spending of the incomes that they generate.

For many countries in the developing world, growth is limited by the size and dynamism of the industries that can sell goods and services abroad. This requires these industries to be competitive enough so that foreigners are willing to buy from them, given that they have so many other options to buy from. The speed at which these activities grow eventually determines the speed at which the whole economy grows .

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AP®︎/College Macroeconomics

Course: ap®︎/college macroeconomics   >   unit 5.

  • Economic growth through investment
  • Understanding economic growth
  • The aggregate production function and growth
  • Changes in the aggregate production function

Lesson summary: Economic growth

  • Economic growth

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Lesson summary

Key termDefinition
a sustained increase in real GDP per capita over time
(also called ) output divided by population; for example, if real GDP is million and the population is million, real GDP per capita is per person.
(also called ) the amount of output produced per unit of labor
improvements in education, knowledge, and wealth that make each unit of labor more productive
government policies that promote rightward shifts of aggregate supply, such as increasing labor force participation and incentives to save and invest

Key Takeaways

An increase in real gdp is not necessarily economic growth, sources of economic growth.

  • The stock of capital per worker : All else equal an economy with more physical capital can produce more than an economy with less physical capital. Because savings and investment add to the stock of capital, more investment in capital leads to more economic growth .
  • The amount and quality of labor : As long as the capital per worker does not decrease, more labor leads to more production. For example, 4 people that each have a waffle maker make fewer waffles than 10 people that each have a waffle maker. Also, improvements in human capital, such as education and health, improve the productivity of that labor.
  • the know how to combine labor, capital, and natural resources to produce is an important aspect of production. Improvements in technology increase productivity.

Government policies can impact economic growth

  • Investing in infrastructure : infrastructure, like highways or bridges, are physical capital that is available to everyone. By investing in infrastructure, governments add to the capital stock of a country. But infrastructure depreciates, just like any other capital. That means governments must replace depreciated infrastructure to maintain it.
  • Encouraging a higher labor force participation rate, such as tax incentives on labor for participation, can lead to more economic growth.
  • Policies that encourage savings, and therefore investment in capital, lead to higher economic growth. Similarly, policies that encourage technological change, such as tax credits for research and development, also lead to more economic growth.

Key Graphical Models

Economic growth in the production possibilities curve (ppc) model, economic growth in the ad-as model, common misperceptions.

  • Economic growth is the long-run trend of an increase in output over time, not just a temporary fluctuation in output or using previously underutilized resources.

Questions for review

  • Show the impact that an increase in the supply of loanable funds would have on the PPC of an economy. Explain.
  • Show the impact that a decrease in the capital stock would have on the LRAS of an economy. Explain.
  • If the supply of loanable funds increased, more savings would be available at a lower interest rate. This would increase investment in physical capital, and an increase in physical capital increases the productive capacity of the economy.
  • Less capital stock reduces the productive capacity of the economy. Full employment output decreases, so the long-run aggregate supply curve decreases (shifts to the left).

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Growth in income per capita, growth and recipes, objects and ideas.

World Bank. The Challenge of Development: World Development Report 1991. Return to top

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Paul Romer on Growth . EconTalk podcast, August 27, 2007.

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Productivity and long-term growth

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Key messages, potential growth is weak and requires supply-side reforms.

There are some signs that the global outlook has started to brighten, even though growth remains modest. The outlook for medium-term growth remains weak. Reviving potential growth and improving the quality of economic growth will require governments to undertake ambitious supply-boosting structural reforms.

Digitalisation and productivity: A story of complementarities

Policy makers across OECD countries have been facing the challenge of slowing productivity growth for decades, despite the rapid emergence of digital technologies.

Some of these technologies, though promising for enhancing productivity and living standards, have not yet been adopted widely or effectively enough to deliver strong economic gains. Insufficient investment in intangible assets and communication networks has further hindered their potential. The COVID-19 pandemic introduced new challenges and opportunities in this landscape. AI shows significant potential to boost productivity and improve public services, but its widespread adoption also poses risks to competition and inclusion. A comprehensive policy approach is needed to accelerate digital uptake and share its benefits more equitably.

Latest report:  The impact of Artificial Intelligence on productivity, distribution and growth

Tackling gender inequality can help remedy current labour market tightness

While progress has been made, the employment rate for women still lags that of men, and gender pay gaps remain prominent across many OECD countries. Gender gaps in labour market participation can often be traced back to barriers or incentives related to the provision of childcare and parental leave, as well as the design of tax and benefit systems. Addressing such barriers can not only boost gender equality, but also alleviate labour shortages.

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College Term Paper

🖋 best way to write a great college term paper, term paper on economic growth.

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Economic Growth Term Paper:

Economic growth is the process of the increase of the production of goods and services in the economics a country during a certain period of time. Economic growth depends on the great number of factors: the political situation of the country, education, population, innovations, technologies, etc. Generally, economic grows is associated with the increase of production and consumption of the goods and services and the ability of people to pay for it. Economic growth can be achieved only due to the hard work and the correct management of economics. Businessmen should not be controlled by the government but should possess certain freedom and chance for development. Healthy business competition should be permitted in the country in order to enable the smart businessmen develop their firms and enrich the economics of the country with the taxes on their profit.

Evidently, without human resources and high level of education economic growth is impossible, because today we live in the world of technologies and information and only deep knowledge can be considered the key to success. Very often economic growth is connected with investment and donations. Investments can come from other countries which expect that the invested money will develop the economics of the country and bring profit to them. Economic growth is the quantitative indicator and is closely connected with the general growth of the quality of life of the country, its health care and affordability of the proper education, security of people and the reduction of the working hours.

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Economic growth is the aim of every county which wants to be a prosperous one. Economic growth opens wide opportunities for people, so it is extremely important to work hard to achieve it. A successful economic growth term paper is supposed to explain the topic in detail and describe the factors which influence the process. One should distinguish the key components of economic growth and define its advantages and disadvantages. A student should study the process and the factors which cause it on the basis of the direct examples, so that the countries which achieved the economic growth. One should also emphasize that the process of growth is not a permanent one and that such phenomena like crisis and depression follow every economic growth.

In order to cope with the assignment successfully a student should take advantage of the opportunities the Internet offers. A free example term paper on economic growth written by the expert is quite a good piece of help for every student who has troubles with the assignment. With the help of a free sample term paper on economic growth in the web a student will understand how to analyze the topic correctly and format the paper well.

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Causes of economic growth

  • Economic growth means an increase in real GDP. Economic growth means there is an increase in national output and national income.
  • An increase in aggregate demand (AD)
  • An increase in aggregate supply (productive capacity)

causes-of-economic-growth-supply-demand

See latest stats on economic growth

Demand-side causes

In the short term, economic growth is caused by an increase in aggregate demand (AD). If there is spare capacity in the economy, then an increase in AD will cause a higher level of real GDP.

AD= C + I + G + X- M

  • C= Consumer spending
  • I = Investment (gross fixed capital investment)
  • G = Government spending
  • X = Exports
  • M = Imports

Graph showing increase in AD

ad-increase

1. Factors which affect AD

  • Lower interest rates – Lower interest rates reduce the cost of borrowing and so encourages consumer spending and firms to invest. Lower interest rates also reduce mortgage payments and so increase the disposable income of consumers.
  • Increased wages . Higher real wages increase disposable income and encourage consumer spending.
  • Increased government spending (G). e.g. government investment on building new roads or increased spending on welfare benefits, which increase disposable income.
  • Devaluation. A fall in the value of the exchange rate (e.g. Pound Sterling) makes exports cheaper and increases the quantity of exports (X).  A depreciation also makes imports more expensive, reducing quantity of imports and making domestic goods relatively more attractive.
  • Confidence . Increased consumer confidence encourages households to spend by either running down savings or taking out more personal credit. It enables higher spending (C)., which encourages spending (C).
  • Lower tax . Lower income tax will increase the disposable income of consumers and increases consumer spending (C).
  • Rising house prices.  A rise in the price of houses creates a positive wealth effect. Homeowners who see a rise in the value of their houses will be more willing to spend (remortgaging house if necessary)
  • Financial stability . If there is financial stability and banks are willing to lend, then firms will be more willing to invest and investment will increase aggregate demand.

2. Long-term economic growth

This requires an increase in the long-run aggregate supply (productive capacity) as well as AD.

Diagram showing long-run economic growth

supply-side-policies

LRAS or potential growth can increase for the following reasons:

  • Increased capital . e.g. investment in new factories or investment in infrastructure, such as roads and telephones.
  • Increase in working population , e.g. through immigration, higher birth rate.
  • I ncrease in labour productivity , through better education and training or improved technology.

productivity-

more on labour productivity

  • Discovering new raw materials . For example, finding oil reserves will increase national output
  • Technological improvements to improve the productivity of capital and labour e.g. Microcomputers and the internet have both contributed to increased economic growth. In the future, economic growth may come from new technology such as Artificial intelligence (AI) which enables robots to take the place of human workers.

Other factors affecting economic growth

  • Economic and political stability. Stability is important for reassuring firms it is a good idea to invest in increasing capacity. If we see a rise in uncertainty, confidence tends to fall and this can cause firms to delay investment.
  • Low inflation. Low inflation is a good climate for encouraging business investment. High inflation increases volatility.

Periods of economic growth in UK

economic-growth-1980-95

In the 1980s, the UK achieved rapid rates of economic growth, this was caused by

  • Cuts in income tax, increasing disposable income, leading to higher spending and thereby stimulating business investment
  • Boom in house prices, which caused a positive wealth effect, equity withdrawal and higher consumer spending.
  • Rise in confidence, especially amongst south
  • Low real interest rates, which made mortgages cheaper.
  • See: UK economy in the 1980s

Period of great moderation 1992-2007

inflation-growth-90-12

The longest period of economic expansion on record was from 1992 – 2007. This period of economic growth was caused by:

  • Low global inflation, which created a period of economic stability.
  • A rise in house prices, which helped increase consumer spending.
  • Growth in productivity, helped by supply-side reforms.
  • Inward investment helped create new jobs and better labour relations.
  • See: Great moderation

economic-growth-quarterly

The great recession of 2008/09 caused by

  • Credit crunch and fall in bank lending
  • Rise in price of oil – reducing disposable income
  • Fall in confidence
  • Fall in house prices leading to the negative wealth effect.
  • Global recession causing fall in export spending.
  • Does economic growth bring increased living standards?
  • Costs of economic growth
  • Latest growth figures in the UK

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US economic growth for last quarter is revised up slightly to a 1.4% annual rate

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FILE - 2024 Ford F-150 trucks are assembled at Ford’s Dearborn Truck Plant on April 11, 2024, in Dearborn, Mich. On Thursday, June 27, 2024, the government issues the third and final estimate of economic growth – the gross domestic product – in the January-March quarter. (AP Photo/Carlos Osorio, File)

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WASHINGTON (AP) — The American economy expanded at a 1.4% annual pace from January through March, the slowest quarterly growth since spring 2022, the government said Thursday in a slight upgrade from its previous estimate. Consumer spending grew at just a 1.5% rate, down from an initial estimate of 2%, in a sign that high interest rates may be taking a toll on the economy.

The Commerce Department had previously estimated that the gross domestic product — the economy’s total output of goods and services — advanced at a 1.3% rate last quarter.

The first quarter’s GDP growth marked a sharp pullback from a strong 3.4% pace during the final three months of 2023. Still, Thursday’s report showed that the January-March slowdown was caused mainly by two factors — a surge in imports and a drop in business inventories — that can bounce around from quarter to quarter and don’t necessarily reflect the underlying health of the economy.

Imports shaved 0.82 percentage point off first-quarter growth. Lower inventories subtracted 0.42 percentage point.

Picking up the slack was business investment, which the government said rose at a 4.4% annual pace last quarter, up from its previous estimate of 3.2%. Higher investment in factories and other nonresidential buildings and in software and other types of intellectual property helped boost the increase.

Image

After growing at a solid annual pace of more than 3% in the second half of 2023, consumer spending decelerated sharply last quarter. Spending on appliances, furniture and other goods fell by a 2.3% annual rate, while spending on travel, restaurant meals and other services rose at a 3.3% rate.

Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance, called the downshift in consumer spending “a cause for concern.’' Consumers account for around 70% of U.S. economic activity.

“The economy remained resilient in the first quarter,” said Gregory Daco, chief economist at the tax and consulting firm EY. But ”private-sector demand growth was cooling, led by more consumer prudence. Importantly though, the economy is not retrenching, with business investment retaining moderate momentum.”

Many economists have been expecting growth to strengthen in the current April-June quarter. But an Oxford Economics forecasting model — based on economic statistics that have been reported so far — points instead to a tepid 1.3% growth rate this quarter.

The U.S. economy, the world’s biggest, has proved surprisingly resilient in the face of higher interest rates. The Federal Reserve raised its benchmark rate 11 times in 2022 and 2023, to a 23-year high, to try to tame the worst bout of inflation in four decades. Most economists predicted that the much higher consumer borrowing rates that resulted from the Fed’s hikes would send the economy into a recession.

It didn’t happen. The economy has kept growing, though at a slower rate, and employers have kept hiring. In May, the nation added a strong 272,000 jobs , although the unemployment rate edged up for a second straight month, to a still-low 4%. At the same time, overall inflation, as measured by the government’s main price gauge, has tumbled from a peak of 9.1% in 2022 to 3.3% , still above the Fed’s 2% target level.

The state of the economy is sure to be a central topic Thursday night when President Joe Biden will debate Donald Trump, the presumptive Republican presidential nominee. Though the economy remains healthy by most measures and inflation is way down from its peak, many Americans say they’re frustrated that overall prices are still well above their pre-pandemic levels. Costlier rents and groceries are particular sources of discontent, and Trump has sought to pin the blame on Biden in a threat to the president’s re-election bid.

A measure of inflation in the January-March GDP report showed that price pressures accelerated at the start of 2024. Consumer prices rose at a 3.4% annual pace, up from 1.8% in the fourth quarter of 2023. Excluding volatile food and energy costs, so-called core inflation rose at a 3.7% annual clip, up from 2% in each of the previous two quarters.

In light of the still-elevated inflation pressures, the Fed’s policymakers earlier this month collectively predicted that they would cut their benchmark rate just once in 2024, down from their previous forecast of three rate cuts. Most economists expect the first rate cut to come in September, with possibly a second cut to come in December.

Thursday’s report was the third and final government estimate of first-quarter GDP growth. The Commerce Department will issue its first estimate of the current quarter’s economic performance on July 25.

term paper on economic growth

Monthly Economic Review: July 2024

A woman shopping.

The insightful lyrics of Tom Petty’s 1981 hit song “The Waiting” focus on how waiting can be difficult and uncertain. That’s why I quoted them in the November 2017 Monthly Economic Review, when the economy was growing at 3% year over year, unemployment was at its lowest level in 17 years, and we were waiting to see when tightness in the labor market would translate into higher wages and inevitable inflation.

Today, we’re waiting once again. Much like 2017, the economy is going strong and the labor market is still relatively tight. But this time we’re waiting for inflation to come down — and also waiting for the Federal Reserve to decide on when to lower interest rates. Just as the song talks about the challenges of waiting, we’re at a critical moment as consumers, businesses, investors and others wait to learn how they will need to adjust their plans for future economic conditions. It’s a time of uncertainty, reminding us that former Fed Chairman Alan Greenspan once said uncertainty is not just a feature of monetary policy but the determining characteristic.

Unfortunately, no one ever knows with any certainty how fast the economy can grow without generating inflation or impacting inflation expectations. The challenge is that no one can forecast inflation, its momentum or the likely intersection of monetary policy and the economy with much accuracy. When measuring inflation, whose inflation matters — different people and businesses are impacted by inflation in different sectors of the economy — and how it is measured is open to research and analysis. This uncertainty is always an intricate and difficult problem for the Fed. If the Fed keeps the level of interest rates too high, it could slow the economy to the point of recession, causing household and business spending to plummet. Alternatively, if it lowers interest rates too much, it could overstimulate the economy and stoke inflation. We can send someone to the moon, but forecasting the economy remains a challenge due to the dynamic nature of economic factors and the unpredictability of human behavior.

Fortunately, the risks for monetary policy look balanced at the moment.

It is the general consensus of economists and policymakers that the U.S. economy and labor markets have continued to expand in a healthy fashion even though they are doing so with slower momentum. This conforms with the latest gross domestic product data, which shows the economy grew at a 1.4% annual pace in the first quarter. That was down from 3.4% in the fourth quarter of 2023 and was the slowest quarterly growth since the spring of 2022. A key contributor to the deceleration was slower consumer activity. One measure of inflation, the GDP Price Index, was at an annualized rate of 3.1% during the first quarter while the Personal Consumption Expenditures Price Index — the Fed’s preferred inflation barometer — was at 3.4%.

The Fed likely welcomed data that showed household income, spending and saving were all healthy in May, demonstrating that the economy is growing at a slower-but-steady pace. Unadjusted for inflation, disposable personal income (income after taxes) rose 0.5% month over month in May and was up 3.7% year over year. Personal consumption rose 0.2% monthly and was up 5.1% compared with a year earlier. The savings rate rose to 3.9%, the highest in four months. Other data indicates that price pressures are easing. Year-over-year, the PCE index was up 2.6% in May. Over the same period, prices for goods decreased 0.1%, even though prices for services prices rose 3.9%. Food prices were up 1.2% and energy prices were up 4.8%.

Meanwhile the labor market continues to display resilience and has propelled income growth ahead of inflation. Employment growth rebounded strongly with a gain of 272,000 jobs in May after an increase of 165,000 in April. Average monthly employment gains through May were 248,000, only a touch behind the 2023 average of 251,000. 

According to the University of Michigan’s June Consumer Sentiment Survey, consumers exhibited confidence that inflation will continue to moderate, but many expressed concerns about the effect of high prices and weakening income on their personal finances. Federal Reserve Board of Governors member Lisa Cook recently said current policy is putting downward pressure on demand, pointing to high mortgage rates and rising debt delinquency rates, which she said "are not yet concerning for the overall economy but bear watching." Many studies have reported that lower-income consumers are facing significant challenges, impacted by the high level of food, housing and transportation prices. Many consumer companies have noted weakness in spending given the cumulative impact of years of inflation on this demographic. It is uncertain whether economic stress among lower-income families could become larger and derail the current economic expansion. 

The U.S. economy looks resilient enough for the Fed to wait and has afforded the Fed time to do so at this key time. The Fed left interest rates unchanged in June and predicted the rate will change just once before the end of 2024. Chairman Jerome Powell said officials were taking a careful and conservative approach. I wonder if he is singing Petty’s refrain — “You take it on faith, you take it to the heart, the waiting is the hardest part.” 

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  2. Economic growth and development

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  3. Sample Economics Term Paper Summary on Economy of the United States

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COMMENTS

  1. PDF The Facts of Economic Growth

    Instead, all the growth until around 1960 occurs in the bottom 99.9%. The sec-ond point is that this pattern changed in recent decades. For example, average growth in GDP per person for the bottom 99.9% declined by around half a percentage point, from 2.3% between 1950 and 1980 to only 1.8% between 1980 and 2007.

  2. What is economic growth? And why is it so important?

    Volume II: New Perspectives on Well-being and Global Inequality since 1820. "Economic growth is an increase in the production of goods and services over a specific period.". "Economic growth is an increase in the production of economic goods and services, compared from one period of time to another".

  3. (PDF) Economic Growth

    Some time around 1820, th e world growth rate started to rise, averaging just over one half of one percent per year from 1820 to 1870, and peaking. during what Maddison calls the "golden ag e ...

  4. Home

    The Journal of Economic Growth serves as the principal outlet for research in the fields of economic growth and comparative economic development. The journal publishes high quality research that explores the growth process in the contemporary period as well as over the entire course of human history. In particular, the journal encourages the ...

  5. PDF Education and Economic Growth

    With added education, the economy moves from one steady-state level to another, but, once at the new level, education exerts no further influence on growth in such a model. The common approach to estimating this model focuses on the level of income and relates. changes. in gross domestic product (GDP) per worker to.

  6. Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six

    Even if innovation were to continue into the future at the rate of the two decades before 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment ...

  7. PDF The Facts of Economic Growth

    Instead, all the growth until around 1960 occurs in the bottom 99.9%. The second point is that this pattern changed in recent decades. For example, average growth in GDP per person for the bottom 99.9% declined by around half a percentage point, from 2.3% between 1950 and 1980 to only 1.8% between 1980 and 2007.

  8. The Outlook for Long-Term Economic Growth

    DOI 10.3386/w31648. Issue Date August 2023. What are the prospects for economic growth in the United States and other advanced countries over the next several decades? U.S. growth for the past 150 years has been surprisingly stable at 2% per year. Growth theory reveals that in the long run, growth in living standards is determined by growth in ...

  9. PDF The Past, Present, and Future of Economic Growth

    This paper provides a longer-term perspective on economic growth in order to deepen the understanding of the key drivers of economic growth, as well as the constraints that act on it. Figure 1.2 Developing Country Growth Trends, by Region, 1950-2011 Source: Updated from Rodrik 2011b.

  10. Globalization and Economic Growth

    The rapid growing significance of information in all types of productive activities and marketization are the two major driving forces for economic globalization (Gao 2000, p. 1). Economic growth is generally described as the increase in the production of economic goods and services compared from one period to another.

  11. PDF Economic Growth and Human Development

    development has been defined as enlarging people's choices in a way which enables them to lead longer, healthier and fuller lives.3 Clearly, there exists a strong connection between. economic growth (EG) and human development (HD). On the one hand, EG provides the resources to permit sustained improvements in HD.

  12. Foreign direct investment and economic growth: a dynamic study of

    1. Introduction. Investments are the engine of economic growth (Liesbeth et al., Citation 2009) and human development (Torabi, Citation 2015), due to that it is an effective means to increase wealth in national economy, and human community.Amongst the multiple investments, foreign direct investment (FDI) has a vital influence on the economic growth (EG) of a nation, as a condition to attract ...

  13. PDF Final Guide to Writing Economics Term Papers

    A Concise Guide to Writing Economics Term Papers∗. This guide is aimed at helping you write an effective undergraduate economics term paper. The guide offers advice on selecting a paper topic, describes the structure of a typical economics term paper and provides some miscellaneous helpful hints. Following these suggestions will ensure that ...

  14. Pros and cons of an increase in economic growth

    Economic growth from 1900 to 1970 helped reduce levels of inequality in the US and Europe. 3. Social costs of economic growth. If society is geared towards economic growth and maximising consumption it could lead to a decline in quality of life. Maximising hours worked. We can increase economic growth by making people work longer hours, but ...

  15. Economics Essays: Importance of Economic Growth

    Importance of Economic Growth. Economic growth means a rise in real GDP; effectively this means a rise in national income, national output and total expenditure. Economic growth should enable a rise in living standards and greater consumption of goods and services. As a result, economic growth is often seen as the 'holy grail' of macroeconomics.

  16. Economic Growth

    Economic growth means an increase in real GDP - which means an increase in the value of national output/national expenditure. Economic growth is an important macro-economic objective because it enables increased living standards, improved tax revenues and helps to create new jobs. Aspects of economic growth. UK real GDP since 1955.

  17. What are the Challenges of Economic Growth?

    By Ricardo Hausmann (originally published in GrowthPolicy) The challenges of economic growth are very different in different countries. The U.S. and Europe face a certain set of issues that look very different from the issues faced in China or India, or the issues faced in the Americas or in Sub-Saharan Africa.

  18. Economic growth (article)

    Key term Definition; economic growth: a sustained increase in real GDP per capita over time: output per capita (also called real GDP per capita) output divided by population; for example, if real GDP is $ 100 ‍ million and the population is 2 ‍ million, real GDP per capita is $ 50 ‍ per person.: productivity (also called labor productivity) the amount of output produced per unit of labor

  19. Benefits of economic growth

    The benefits of economic growth include. Higher average incomes. Economic growth enables consumers to consume more goods and services and enjoy better standards of living. Economic growth during the Twentieth Century was a major factor in reducing absolute levels of poverty and enabling a rise in life expectancy. Lower unemployment.

  20. PDF Immigration and Economic Growth

    Immigration and Economic Growth George J. Borjas* From 1990 to 2014, U.S. economic growth would have been 15 percentage points lower without the benefit of migration. --Citi Research (2018) There's a way for President Trump to boost the economy by four percent, but he probably won't like it…For every 1 percent increase in U.S. population

  21. Economic Growth, by Paul M. Romer: The Concise Encyclopedia of

    Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most ...

  22. Productivity and long-term growth

    There are some signs that the global outlook has started to brighten, even though growth remains modest. The outlook for medium-term growth remains weak. Reviving potential growth and improving the quality of economic growth will require governments to undertake ambitious supply-boosting structural reforms.

  23. Term Paper on Economic Growth

    Growth Term Paper: Economic growth is the process of the increase of the production of goods and services in the economics a country during a certain period of time. Economic growth depends on the great number of factors: the political situation of the country, education, population, innovations, technologies, etc.

  24. Causes of economic growth

    In the short term, economic growth is caused by an increase in aggregate demand (AD). If there is spare capacity in the economy, then an increase in AD will cause a higher level of real GDP. AD= C + I + G + X- M. C= Consumer spending. I = Investment (gross fixed capital investment) G = Government spending. X = Exports.

  25. US economic growth for last quarter is revised up slightly to a 1.4%

    Japan revises economic growth in 1Q downward, as latest data show sluggish demand and rising prices. After growing at a solid annual pace of more than 3% in the second half of 2023, consumer spending decelerated sharply last quarter. Spending on appliances, furniture and other goods fell by a 2.3% annual rate, while spending on travel ...

  26. Monthly Economic Review: July 2024

    The insightful lyrics of Tom Petty's 1981 hit song "The Waiting" focus on how waiting can be difficult and uncertain. That's why I quoted them in the November 2017 Monthly Economic Review, when the economy was growing at 3% year over year, unemployment was at its lowest level in 17 years, and we were waiting to see when tightness in the labor market would translate into higher wages ...