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The Secret of Economic Growth: Why Real GDP Becomes the Key Indicator?
Economic growth is often defined as the increase or improvement in an economy's performance, adjusted for inflation, over a fiscal year. Economic growth rate is usually calculated as real gross domestic product (GDP) growth rate, real per capita GDP growth rate or per capita national income (GNI) growth rate. In economic analysis, "growth rate" is used to express the geometric annual growth rate of GDP or per capita GDP over a period of time.
Economic growth is usually measured in “real” terms, that is, adjusted for inflation to remove the distorting effects of inflation on commodity prices.
Measurements of economic growth rely on national income accounts and are based on a number of factors: labour productivity, hours worked, labour force participation of the working-age population and that group's share of the total population. Changes in these factors play an important role in promoting GDP and economic development.
Drivers of Economic Growth
Economists distinguish between long-term and short-term economic growth. Economic changes over the short term are known as business cycles, while economic growth focuses on long-term production trends. This trend is often driven by structural factors such as technological growth and accumulation of production factors.
Increases in productivity, or the ratio of value produced per unit of labor input, is generally the most important factor in real per capita economic growth.
Take the United States as an example. According to an estimate by MIT professor Robert Solow, technological progress accounts for as much as 80%, while capital growth accounts for only 20%. As productivity increases, the real cost of goods decreases, thereby promoting economic growth.
Since the mid-19th century, rapid economic growth has come mainly from the efficient use of labor, means of production and energy, accompanied by the innovation of new products. With the advancement of industrialization, humans have been able to significantly improve production efficiency and escape the traditional Malthusian trap.
Increase in productivity
Since the beginning of the Industrial Revolution, productivity growth has been one of the main drivers of real economic growth. With the advancement of technological innovation and mechanization, the efficiency of factories and production lines has been gradually improved, and the use of manual labor has been minimized in the production process.
Roughly 60% of consumer spending went to goods and services that did not exist in 1869, clearly demonstrating the importance of technological progress.
Another driver of economic growth is the accumulation of capital. Increases in physical capital, including equipment and buildings, provide the basis for increasing output per worker. In addition, changes in the demographic structure, such as an increase in the labor force participation rate, will also affect economic growth.
Human capital and health impacts
The impact of human capital, that is, the skills of the population or labor force, on economic growth cannot be ignored. Many economic models incorporate levels of human capital, usually measured by educational attainment. There is a close correlation between a country's education level and its economic growth.
Health is viewed as an important resource for individuals to achieve economic success, not just a state of being sick or not.
According to Amartya Sen and Martha Nussbaum's capability theory, health means that people have the opportunity to realize their potential. By improving public health and medical systems, we can promote economic growth, reduce labor turnover and increase returns on investment.
The role of political institutions
Political institutions are also crucial to economic growth. Good legal institutions and appropriate business policies can promote economic activity, lower barriers to market entry, and stimulate innovation and investment.
In different countries, the quality of the political system will directly affect the speed and sustainability of the country's economic development.
For example, the economic development history of the United Kingdom shows that the improvement of state capacity is accompanied by the improvement of the legal system, giving people more economic freedom and protection. However, this model cannot be replicated everywhere because of huge differences in social and economic structures among countries.
In today's rapidly changing global economy, real GDP has become an important indicator of global economic collision and cooperation because it truly reflects a country's economic performance and potential. This indicator represents not only a country's economic data, but also a microcosm of the living conditions of all its citizens. In the future, with technological advances and policy changes, will our economic growth continue, or will we face new challenges and opportunities?
