Economic Growth: Definition, How it Works, Types, and Phases

Economic growth refers to an increase in a country’s production of goods and services over one period of time compared with a previous period of time, measured by the increase in real gross domestic product (GDP) or gross national product (GNP) of a country. Economic growth leads to a rise in the standard of living for individuals within that country, and an increase in the quantity and quality of resources, such as labour and capital, available for production.

There are three main types of economic growth, extensive growth, intensive growth, and sustainable growth. Economists also identify varying phases of economic growth, including takeoff, acceleration, maturity, and decline. Economic growth is driven by four main factors, such as technology advancements, international trade, government policies, and investments in human capital.

Economists typically measure economic growth by tracking changes in real GDP over time. Real GDP represents the value of all goods and services produced in a country, adjusted for inflation. Extensive growth occurs when there is an increase in the amount of inputs used in production, such as labor and capital.

Intensive growth, on the other hand, occurs when there is an increase in productivity, leading to higher output per unit of input. Sustainable growth is a type of economic growth that can be maintained over time without causing environmental degradation or resource depletion.

What does Economic Growth mean?

Economic growth refers to the increase in the inflation-adjusted market value of goods and services in an economy over a certain period in a fiscal year, typically measured by the increase in real GDP or GNP. Economic growth happens when there is an increase in the quantity and quality of resources available for production. This often leads to higher standards of living and increased prosperity for individuals within the economy.

Economic growth can be measured by the below indicators.

1. Gross Domestic Product (GDP)
2. Gross National Product (GNP)
3. Gross Domestic Income(GDI)
4. Net National Product (NNP)
5. Per capita income
6. Employment rate
7. Inflation rate
8. Consumer Price Index (CPI)
9. Producer Price Index (PPI)
10. Balance of Trade (BOT)

Economic growth is generally considered to be good for the overall economy and the country as it indicates an increase in the production of goods and services within a country, which leads to increased incomes and living standards for the population. Other potential benefits of economic growth include job creation, investment opportunities, and the ability to fund social programs and infrastructure development.

How does the Economy Grow?

The economy grows through factors that include consumer spending, technology advancements, international trade, government policies, and investments in human capital. These factors contribute to extensive growth, where there is an increase in the amount of inputs used in production, and intensive growth, where there is an increase in productivity leading to higher output per unit of input.

Economic growth has both positive and negative effects on various participants of the economy. Economic growth increases the demand for labour, leading to higher wages, job opportunities, and improved working conditions in certain sectors. But some workers may face displacement or lower wages if their skills or industries become obsolete or face competition from imports or automation.

Economic growth provides firms with more customers, profits, and investment opportunities, enabling them to expand operations, innovate, and create new jobs. But some firms will face challenges from higher costs of inputs, competition, or regulations that offset their gains.

Economic growth increases consumers that is sustained over time without environmental degradation or resource depletion. These factors and types of growth also lead to varying phases of economic growth, including takeoff, acceleration, maturity, and decline.

What is the formula for Economic Growth?

There is more than one way to calculate economic growth, but one common formula is GDP_2 – GDP_1)}{GDP_1} \times 100\%

GDP1 represents the initial level of GDP, and GDP2 represents the final level of GDP after a certain period. The difference between GDP2 and GDP1 is divided by GDP1 and multiplied by 100% to express the growth rate as a percentage.

This formula can also be used with other measures of economic activity, such as GNP or NNP. But it is important to take into account factors such as inflation and population growth when interpreting the results of the above formula.

How to calculate Economic Growth?

Suppose the GDP of a country was $100 billion in 2022, and it increased to $110 billion in 2023. Using the formula for economic growth, we can calculate the growth rate as follows using the formula GDP_2 – GDP_1)}{GDP_1} \times 100\%

That is,

($110 billion – $100 billion) / $100 billion x 100% = 10%

Therefore, the economic growth rate for the country between 2022 and 2023 was 10%.

What are the types of Economic Growth?

Intensive economic growth and extensive economic growth are the two types of economic growth. Below are a few more details about them.

1. Intensive Economic Growth

Intensive economic growth is a type of economic growth that focuses on increasing productivity, leading to higher output per unit of input. This type of growth usually involves improving technology, increasing efficiency, and investing in human capital.

Intensive growth helps to increase the standard of living for individuals within the economy, as it leads to higher wages, increased profits, and improved job opportunities. But it need not necessarily lead to an increase in the number of jobs available.

2. Extensive Economic Growth

Extensive economic growth is a type of economic growth that focuses on increasing the quantity of inputs used in production. This type of growth usually involves increasing the size of the labour force, expanding infrastructure, and improving access to resources.

Extensive growth leads to an increase in the number of jobs available and an increase in the production of goods and services, leading to higher incomes and living standards. But it may also lead to environmental degradation and resource depletion if not managed sustainably.

Both intensive and extensive growth is required at a balance for any economy to the peak. An economy that focuses exclusively on extensive growth will eventually face diminishing returns and limits to growth.

What are the Phases of Economic Growth?

There are four phases of economic growth including peak, trough, expansion, and contraction. Below are more details about each phase.

1. Peak

The peak phase of economic growth is the highest point of the economic cycle, where the economy is at its maximum level of growth. The economy is operating at full capacity, with low levels of unemployment, and high levels of productivity and output. There is also increased demand for goods and services, which often leads to inflationary pressures.

2. Trough

The trough phase of economic growth is the lowest point of the economic cycle, where the economy is experiencing a decline in growth. There is high unemployment, low levels of productivity and output, and low demand for goods and services at this stage. The economy is generally in a recession, and recovery may take time.

3. Expansion

The expansion phase of economic growth is a period of increasing growth and recovery from the trough phase. The economy is experiencing an increase in output, employment, and productivity. The demand for goods and services is also increasing, leading to higher prices and inflation. This phase is characterized by increased consumer confidence and business investment.

4. Contraction

The contraction phase of economic growth is a period of declining growth after the peak phase. The economy is experiencing a decrease in output, employment, and productivity. There is also a decrease in demand for goods and services, leading to lower prices and deflation. This phase is characterized by decreased consumer confidence and business investment.

Each phase presents unique opportunities and challenges, which require careful management by policymakers and businesses. Understanding these phases is crucial for making informed decisions about investing, employment, and consumption, and for achieving sustainable economic growth over the long term.

What are the factors that affect Economic Growth?

Natural resources, technology, human resources, infrastructure, social factors, and political factors are factors that greatly affect economic growth. Read on to find out more details about each.

1. Natural Resources

Natural resources play a significant role in economic growth. Countries with abundant natural resources such as oil, gas, minerals, and timber tend to have higher economic growth rates than those without. The proper management of resources is also essential to achieve sustainable growth. Overexploitation of natural resources may lead to environmental degradation and depletion.

2. Technology

Technological advancements increase efficiency, productivity, and output while reducing costs. Technology also leads to the development of new products and services, which fuels economic growth. Countries that invest in technology and research and development tend to have higher economic growth rates.

3. Human Resource

Human resources, including education and training, are crucial for economic growth. An educated and skilled workforce is necessary for innovation, productivity, and competitiveness. Investing in education and training programs leads to higher economic growth rates and improved living standards.

4. Infrastructure

Infrastructure, including transportation, communication, and energy, is critical for economic growth. Improving infrastructure can lead to increased productivity, efficiency, and competitiveness, as well as improved access to resources and markets. Infrastructure investment is essential for sustainable economic growth and development.

5. Social Factor

Social factors, including income inequality, poverty, and social inclusion, also affect economic growth. Reducing income inequality of the workers in a country and providing social safety nets to everyone stimulate consumer demand and improve overall economic growth. Improving social inclusion also increases workforce participation and productivity, leading to higher economic growth rates.

6. Political Factor

Political stability in one country and government policies greatly affect economic growth. Stable political environments attract foreign investments and create favourable conditions for businesses. Policies that promote business development, innovation, and entrepreneurship can also stimulate economic growth. Political instability and unfavourable policies can hinder economic growth and discourage investment, on the contrary.

A combination of these factors is necessary for sustained economic growth. Policymakers and businesses need to work together to create an environment that fosters investment, innovation, and sustainable development.

Which factor affects Economic Growth significantly?

All the factors including natural resources, technology, human resource, infrastructure, social factors, and political factors, affect economic growth significantly. A combination of these factors is necessary for sustained economic growth. Their relative importance to individuals varies from one country or economy to another depending on their unique circumstances.

How does Economic Growth affect the Stock Market?

Companies tend to have higher profits, leading to increased stock prices during economic growth. This leads to more consumers buying goods and services, which boosts the demand for stocks. But during periods of economic contraction, companies may experience reduced profits and lower stock prices.

Economic growth indicators such as GDP, inflation, and employment rates can influence investor sentiment, leading to changes in the stock market. Thus, a strong economy tends to drive up the stock market while a weak economy drives it down.

How does Economic Growth affect Investments?

Economic growth generally has a positive effect on investment. Investors tend to look for investment opportunities in the stock market or other high-growth industries when the economy is growing. This results in higher returns on investments.

But during times of economic contraction, investors become more risk-averse and tend to put their money into safer investment options such as bonds or cash reserves. Understanding economic growth and its impact on investments is critical for making informed investment decisions that align with one’s financial goals and risk tolerance.

How does Economic Growth affect our Daily lives?

A growing economy tends to increase employment opportunities and wages, leading to improved living standards. It also leads to the development of new products and services, which provide more choices to consumers.

There is a greater demand for goods and services, leading to lower prices and increased affordability. But during times of economic contraction, people may experience unemployment, reduced wages, and higher prices.

What are the Positive effects of Economic Growth?

Economic growth leads to increased production of services and goods in general, which has significant positive effects. Below listed are five positive effects of economic growth.

1. Increased employment opportunities and higher wages, leading to improved living standards.
2. Development of new products and services, providing more choices to consumers.
3. Increased affordability due to lower prices resulting from greater demand for goods and services.
4. Higher returns on investments, making it easier to achieve financial goals. Improved infrastructure and access to resources and markets.
5. Stimulated consumer demand leading to higher profits for businesses and increased stock prices.

Economic growth has a significant impact on various aspects of our lives, including our financial, social, and environmental well-being.

What are the Negative effects of Economic Growth?

Economic growth also has negative effects. Below listed are six negative effects of economic growth.

1. Increased pollution and environmental degradation resulting from increased production.
2. Overconsumption of natural resources, leading to depletion and scarcity.
3. Widened income inequality due to uneven distribution of wealth and resources.
4. Greater risk of inflation due to increased demand for goods and services, leading to higher prices.
5. Increased national debt resulting from excessive government spending on public works and other infrastructure projects.
6. Increased risk of market bubbles and financial crises due to overinvestment and speculation.

It is important for policymakers to consider both the positive and negative effects of economic growth when making decisions regarding investment

What is an Economic Growth examples?

China’s economic growth over the past few decades, which has turned it into a global economic power is a primary example of economic growth. The numbers prove this fact. China was ranked as the 11th largest economy globally, in 1980 and now, it is the second-largest economy after the USA. India is another example. India experienced significant economic growth over the past few years.

Its GDP growth rate has been around 7% for several years. The growth in the technology industry in recent years, thanks to companies like Apple, Amazon, and Google, has also contributed significantly to economic growth.

Does the Stock Market contribute to Economic Growth?

Yes, the stock market contributes to economic growth by providing companies with access to capital for investment and growth, which in turn can lead to job creation and increased production of goods and services. A strong stock market increases wealth and consumer confidence, leading to increased spending and economic activity.

Is Economic Growth good for everyone?

Yes, economic growth is generally considered good. But it has both positive and negative effects. A growing economy tends to increase employment opportunities, wages, and improved living standards. But economic growth also leads to increased pollution, income inequality, and other negative effects.

Does Economic Growth make us happy?

According to Journalist Imran Hashmi’s analysis, there is a weak positive relationship between economic growth and national well-being, with well-being scores slightly increasing as Gross Domestic Product (GDP) increases. This relationship breaks down at the local level, with no significant relationship between personal well-being measures and local economic growth.

High well-being scores in local authorities do not necessarily correlate with high economic growth or productivity. This suggests that relying solely on GDP as an indicator of progress may be insufficient and that it’s important.

What is the difference between Economic growth and Economic development?

Economic growth refers to the increase in the production of goods and services in a country over a period of time, usually measured by Gross Domestic Product (GDP). Economic development, on the other hand, focuses on improving the quality of life for people in a country through various initiatives such as education, healthcare, and social welfare programs.

Economic development aims to create sustainable growth by addressing social and environmental issues, whereas economic growth focuses primarily on increasing production and profits. Economic development also emphasizes equity and reducing disparities, while economic growth does not necessarily address these issues.

Arjun Remesh

Head of Content

Arjun is a seasoned stock market content expert with over 7 years of experience in stock market, technical & fundamental analysis. Since 2020, he has been a key contributor to Strike platform. Arjun is an active stock market investor with his in-depth stock market analysis knowledge. Arjun is also an certified stock market researcher from Indiacharts, mentored by Rohit Srivastava.

Shivam Gaba

Reviewer of Content

Shivam is a stock market content expert with CFTe certification. He is been trading from last 8 years in indian stock market. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. He won Zerodha 60-Day Challenge thrice in a row. He is being mentored by Rohit Srivastava, Indiacharts.