Economic Growth

The total output of an economy can be represented by a national income measure called Gross Domestic Product (GDP). This section looks at the relationship between economic output, laborer productivity and the growth of an economy's GDP. Further discussion of GDP accounting will be presented in section titled 'Gross Domestic Product'.

Sources of Economic Growth:

  1. Aggregate Hours - the total amount of work hours performed by laborers
  2. Labor Productivity - the amount of output per worker hour (also known as Real GDP/labor hour)

Labor productivity can increase through advances in:

  • Physical capital - when firms increase the amount of equipment per laborer
  • Human capital - when individual laborers become more educated
  • Technology - new developments increase laborer productivity; productivity is measured as output per labor hour

Preconditions of Economic Growth

The existing scenarios that make it possible for aggregate hours and labor productivity to grow an economy are:

  • Specialization: when a laborer focuses on the economic activity that he/she does best; in other words, the activity in which he/she has a comparative advantage
  • Trade: institutions that facilitate trade among economic actors are:
    1. Property rights
    2. Markets
    3. Monetary exchange