4.4.4—Causes of growth

Economic growth can result from an increase in the quantity of factors of production or from higher productivity—the ability to produce more output from the same inputs.

Investment raises the capital stock; education and training improve human capital; better technology, infrastructure, entrepreneurship and institutions can raise total factor productivity. More labour or land can expand capacity, but diminishing returns may limit the effect.

A factory that buys an additional machine may produce more with the same workforce. If software then lets each worker coordinate twice as many orders, productivity—not merely the number of machines—has improved.

A temporary rise in spending can raise actual output without increasing productive potential. Long-run growth requires a lasting capacity or productivity change.