sources of growth

If you want to know why one economy produces far more than another, you can break the answer into ingredients. Imagine baking more bread: you could hire more bakers, buy more ovens, or discover a faster recipe. An economy grows in the same three ways, by adding labour, by adding capital, and by getting better at turning both into output. Together these are the sources of growth.

Economists usually name three. The first is labour: more workers, or workers putting in more hours, though there are limits to how many people there are and how long anyone can work. The second is capital: more machines, buildings, roads and equipment per worker, which makes each worker more productive but runs into diminishing returns, since the tenth machine in a workshop adds less than the first. The third, and the deepest, is technology and ideas, often bundled into total factor productivity, meaning better ways of combining labour and capital. A useful refinement splits labour into raw hours and human capital (the skills and education embodied in workers), since an educated workforce produces far more than an untrained one. Growth accounting estimates how much of measured growth each source contributed.

These ingredients matter because they explain why catch-up growth and sustained growth feel so different. A poor country can grow quickly for a while just by accumulating capital and education, closing the gap with richer ones. But because capital faces diminishing returns, no country can grow forever just by stacking up more of it; long-run growth in income per person depends on the third source, technological progress, which has no obvious ceiling. This is the central lesson behind the Solow growth model and most modern thinking about why nations prosper.