CH - 20 // Economic Growth

Economic Growth

The long-run increase in a country’s production of goods and services.

What is the most common measure of economic growth?

The growth rate of real GDP per capita.

Real GDP per capita

Real GDP divided by the population, showing average output per person.

Why is real GDP per capita important?

It measures the standard of living more accurately than total GDP.

Productivity

How much output is produced per worker or per hour of work.

What is the key driver of long-term economic growth?

Increases in productivity.

Physical capital

Machines, tools, and buildings used to produce goods and services.

How does investment in physical capital affect growth?

It increases workers’ productivity, helping the economy grow.

Human capital

The skills, education, and training workers have.

Why is human capital important for economic growth?

More skilled workers can produce more output.

Technology

Better methods, tools, or processes that improve productivity.

How does technology contribute to growth?

It allows more output with the same amount of labor and capital.

Institutions

Rules, laws, and systems that shape economic behavior.

Why are strong institutions important?

They encourage investment, innovation, and entrepreneurship.

Convergence

The idea that poorer countries can grow faster and “catch up” to richer ones.

Why might poorer countries grow faster?

They can adopt existing technology rather than invent it.

Capital deepening

When the amount of capital per worker increases.

Does capital deepening always lead to permanent growth?

No — it eventually faces diminishing returns.

Diminishing returns

When adding more capital increases output, but by smaller and smaller amounts.

What can overcome diminishing returns?

Technological progress.

Innovation

The process of creating new ideas, products, or processes.

Why is innovation important for growth?

It increases productivity and creates new industries.

Savings

Income that is not spent; used to finance investment.

How do savings help the economy grow?

They fund investments in capital and technology.

Infrastructure

Public systems like roads, electricity, and internet that support production.

Why is infrastructure important for growth?

It lowers costs and increases productivity.

Research and Development (R&D)

Spending on creating new technology and ideas.

Why do governments support R&D?

Because it creates long-term economic growth.

Labor productivity

Output per worker; a main factor driving living standards

What three things increase labor productivity?

More human capital, more physical capital, and better technology