Whether you are thinking about your personal wealth or the growth of your portfolio, growth is good. Economic growth is how much the value of all the finished goods and services in a country rises over a certain period of time. It is measured by gross domestic product (GDP).
GDP equals the total market value of all the finished goods and services produced within a country’s borders in a given time. To make it easier to compare different regions, the figure is usually adjusted for population—that is, GDP per capita. This adjustment is widely used to measure economic progress.
But there is a problem with this simple equation. If the economy grows faster than population, then GDP per person will decline even if everyone’s income rises. To avoid this, you need to find ways to produce more with the same number of people or, better yet, increase the output per worker. This is where productivity comes in.
Economists study different types of productivity, including labor and capital productivity. But perhaps the most important type is material productivity, which measures how much economic output you get per unit of materials consumed.
Many things can affect a country’s GDP and its prospects for future growth. McKinsey Global Institute research suggests that a major change in labor policies and an improved system for deploying human capital would boost the potential for growth. Also, lowering the cost of importing raw materials and increasing efficiency in extracting natural resources can help.