Economic growth is the increase in the market value of additional goods and services produced by an economy over time as measured by estimates such as gross domestic product (GDP). This translates into higher living standards for the population.
An important factor in economic growth is an improvement in labor productivity. More output per worker (or labor input) leads to a higher standard of living as the extra income goes to households and businesses for consumption or investment.
The rate of productivity improvement is the result of many factors, but the main driver is technological advance. This accounts for about 40 percent of the observed increase in productivity, while increases in capital, improved resource allocation, and economies of scale explain another 15 percent.
One way to boost productivity is to add more physical capital goods, such as machinery and buildings. This tends to raise labor productivity by allowing workers to produce more in a period of time than they could without the new equipment. However, two things are critical to this process: Someone in the economy must engage in savings in order to create the new capital; and the new equipment must be the right kind and in the right place for workers to use productively.
A second approach to economic growth is to expand the labor force. This tends to lead to higher incomes, which in turn inspire consumers and businesses to buy more. However, this method can be more problematic as it requires an influx of new workers who must consume enough to cover their basic subsistence and thus be net consumers of the output generated by their labor.