Sources of economic growth

Broadly speaking, there are three ingredients to economic growth:

Physical capital. These are the machines, equipment, buildings, land, and other tangible inputs into the production process. When companies invest in more equipment, this allows them to expand production over time and to contribute to economic growth.

Labor. These are all the people employed in the economy. The economy can expand by simply increasing the number of people who work. This could be the result of population growth or greater labor force participation rate. For example, the entry of female workers into the labor force has been a great boost to economic development in many countries.

Germany is one example. The chart shows the labor force participation rate for German women. In 1992, 48 percent of German women who could work were either employed or were looking for a job. By 2014, that number increased to 54 percent. Those additional workers produced goods and services and helped expand the economy.



Productivity. Productivity is the amount of output produced with given labor and physical capital. The question here is not how many people are working and what machines they use but how well the labor and machines are put to use. Is the work organized well? Are resources wasted on inefficient company practices or in dealings with a corrupt public administration?

In short, the economy can expand if there are more people working, if they use more machines and equipment, and if the people and machines are put to better use.


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