Economic growth is a crucial factor in reducing poverty and increasing living standards. Consistent economic growth encourages employment and cuts unemployment rates, which in turn aids in lowering income disparity. It also increases tax revenue and decreases government spending on welfare benefits connected to unemployment and poverty. It also encourages new investment, such as in lowcarbon technology.
The main driver of economic growth is the stock of physical capital, a combination of tools and raw materials that can be used to produce more goods. Savings and investments increase the stock of capital, and improvements in human capital and labor productivity boost output per worker.
In a market economy, the value of an object or service depends on the preferences of its users. This means that a heater is worth more to a resident of Alaska than a pair of socks, and that the same person may consider an airline ticket more valuable than a movie ticket. These factors must be weighed when measuring the rate of economic growth, which is why economists use the statistic known as gross domestic product (GDP) to measure economic output.
GDP reflects the market value of goods and services produced in a country, but it does not account for all economic activity. For example, a parent who stays home to care for children or an elderly relative does not contribute to GDP. Also, a company that invests in an environmentally friendly production process may incur costs that are not captured by GDP, but which contribute to healthier workers and a cleaner environment.
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