Economic growth is the increase in the value of an economy’s total output. It may be measured by a country’s gross domestic product (GDP), or in terms of a country’s per-capita GDP.
In the long run, economic growth is determined by structural factors such as technological change and factor accumulation. In the short run, a variety of causes lead to ups and downs in economic growth, called a business cycle. These ups and downs can be characterized by changes in aggregate demand. Each component of aggregate demand—consumer spending, investment, government spending, and exports—makes a contribution to economic growth. The size of that contribution is determined by its share of aggregate demand and by its growth rate. Consumer spending is the largest contributor to economic growth, with investments and government spending making smaller contributions. The growth of each of these components can vary significantly from quarter to quarter, making a single business cycle hard to define.
A key ingredient in economic growth is labor productivity. There are a number of ways to raise labor productivity. One way is to grow the labor force, which expands the number of workers in the economy. Another way is to make work more productive, for example, by improving technology. New technologies can allow workers to produce more output with the same stock of capital goods or human resources.
In addition to expanding labor and capital, fostering innovation is essential to economic growth. McKinsey research shows that promoting greater racial economic parity can help create economies and societies with more potential for economic growth.