Economic growth means that an economy has increased its ability to produce more. When an economy is producing beyond potential output, it might have experienced an increase in real GDP, but that is not economic growth.

Similarly, an economy that is recovering from a recession might experience an increase in real GDP, but that is not economic growth.

Sources of economic growth

Economic growth is an increase in the capacity to produce. Therefore anything that increases that capacity is economic growth.

The ability to produce depends on:

1. 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.

2. 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.

3. The level of technologythe 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

Government policies play a big part in encouraging (or discouraging) economic growth.

Some examples of economic policies that contribute to economic growth are:

1. 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.

2. Policies that affect productivity and labor force participation.

* Encouraging a higher labor force participation rate, such as tax incentives on labor for participation, can lead to more economic growth.

3. Policies that encourage capital accumulation and technological change

* 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.

In conclusion, An economy grows:

1. When it has the capacity to produce more.

2. When Production is based on how much capital, labor, natural resources, and technology it has to produce.

3. When Policies that encourage the accumulation of any of these leads to economic growth.