Economic growth is an increase in the amount of goods and services produced by a country in one period compared to another. It is an important indicator of a country’s wealth and well-being. However, the way that the fruits of growth are distributed — and how broadly they’re experienced by people – is equally critical to its sustenance and progress.
An economy’s potential growth rate is determined by the combination of factors like labor force, capital accumulation, and technological advances. Actual growth rates are influenced by consumer spending, government policies, and external economic conditions. They can fluctuate over time, for example during the 2008 financial crisis and in response to COVID-19 lockdowns.
The main components of aggregate demand are consumption, investment, and exports. Consumption accounts for over half of GDP and tends to grow at a steady rate, so it makes a large contribution to economic growth. Investment, which includes spending on building and maintaining infrastructure, purchasing equipment and machinery, and undertaking research and development, is a smaller share of GDP but can make a greater contribution to, or subtract from, growth at different times. Exports also make a contribution to growth but are more volatile because of trade flows.
When growth is sluggish or stalling, it can be difficult for businesses and people to feel better off, so they spend less and save more. This can exacerbate long-run structural drags on demand and widen inequality. But McKinsey research suggests that if policy makers and business leaders prioritize economic growth that creates jobs, raises incomes, and drives productivity, it can address current inequality and set the stage for more inclusive growth in the future.