Economic growth is a hot topic for economists, but it’s just as important to business leaders and people in the workforce. Economic growth enables individuals and companies to earn more and purchase more goods and services. If an economy stalls or contracts, the resulting slowdown hurts everyone. Economic growth also reduces the sting of scarcity, the reality that there are limited resources and a finite amount of money available to meet all of our wants. By increasing the size of the pie, economic growth gives everyone a bigger slice without having to reshuffle existing slices, a process called redistribution.

There are three ways to achieve sustainable long-term economic growth: accumulating more capital, increasing the labor force or improving the use of existing capital and labor. The latter involves boosting productivity through better technology and managerial practices. The higher a country’s level of technological development, the more productive its workers are, which ultimately increases GDP per capita.

The economy experiences a high rate of growth when demand for goods and services rises from low levels during a recession. This “catch-up” economic growth often results from businesses hiring workers and more fully utilizing capacity that was idled during the downturn. However, this type of growth is not sustainable and cannot continue forever. Countries with faster rates of economic growth tend to have stronger economic institutions, such as laws and customs that reward and support productive activity. As Douglass North writes, these institutions can be “the foundation of a nation’s life.”