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Updated January 8, 2019
Introduction to U.S. Economy: GDP and Economic Growth
The amount of economic activity within the country is one
consumption (expenditures by households), (2) investments
of the main concerns for policymakers. Whether economic
(largely expenditures by businesses), (3) government
activity is growing, known as an expansion, or shrinking,
spending, (4) imports, and (5) exports. In calculating GDP,
known as a recession, can provide significant insight into
the value of net imports (imports less exports) is used.
the well-being of a country’s inhabitants. For this reason,
the growth rate of economic activity and the determinants
Alternatively, GDP can be calculated through the income
of that growth are the subject of much research in the field
approach. Under the income approach, GDP is calculated
of economics.
by summing all income earned within the economy,
including wages, rental income, interest income, and
What is Economic Activity?
profits. Total income earned within the economy is often
Economic activity includes any actions involved in the
referred to as national income. Measurements of GDP
production, distribution, and consumption of goods and
produced through the expenditure approach and income
services. Households purchasing goods and services,
approach are equivalent because the final market price of a
businesses purchasing new factories and paying wages, and
good or service will reflect all of the incomes earned and
government spending is considered economic activity.
costs incurred throughout the production process.
Figure 1. Circular Flow of Resources
Economic Growth
Growth in economic activity brings about benefits to
economic actors, and it is the predominant measure of
changes in material living standards. In general, as GDP
grows, individuals’ incomes increase, as does the
production of goods and services. So as economic activity
increases, individuals not only have access to more goods
and services, but they also have more income to purchase
those goods and services. However, GDP growth does not
give any indication of how income growth is distributed
within the economy.

Notes: This is a simplified representation of the economy. Other
sectors, including the government, financial sector, and imports and
Economic growth is fueled by a number of factors, and
exports, can also be represented as flows within the economy.
which factors are most important differ depending on the
timescale with which policymakers are concerned. In the
near term, growth in economic activity is largely governed
Economists generally view economic activity as a circular
by the business cycle, which shifts from expansionary
flow of resources. As shown in Figure 1, businesses
phases, to contractionary phases (recessions), and to
purchase their factors of production—land, labor, and
recoveries. Policymakers can use monetary and fiscal
capital—from households to produce goods and services.
policies to affect aggregate demand (i.e., total spending) in
Households then use the income earned from businesses to
an effort to diminish the volatility of changes in economic
purchase goods and services. Income that households
growth due to the business cycle. However, these policies
choose to save remains in the circular flow of resources; it
are unlikely to have large impacts on the long-term growth
is distributed to businesses through the financial sector in
rate of the economy. For further information on the
the form of loans rather than through consumption
business cycle, refer to CRS In Focus IF10411,
spending.
Introduction to U.S. Economy: The Business Cycle and
Measures of Economic Activity
Growth.
The standard measure of economic activity is gross
To affect the economy’s long-term growth rate, it is
domestic product (GDP), which is calculated in the United
important to focus on the supply side of the economy
States by the Bureau of Economic Analysis. GDP is defined
instead of factors that impact demand within the economy.
as the total value of all final goods, services, and structures
In the long run, the rate of economic growth is largely
produced by a nation’s economy during a specified
dependent on the economy’s ability to increase its
period—in other words, the total value of the economy’s
productive capacity over time.
output.
Determinants of Long-Term Growth
GDP can be measured in two different ways. The
The long-term growth rate is largely determined by the
expenditures approach calculates GDP by summing all
amount of physical capital, human capital, and the rate of
expenditures on goods and services by final users.
technological change in the economy.
Expenditures are divided into five categories: (1)
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Introduction to U.S. Economy: GDP and Economic Growth
Physical Capital
productivity of the economy. Changes in regulatory
Physical capital includes all the man-made resources
structure, trade policies, or patent laws, which may impact
workers use to produce goods and services, including tools,
the productivity of the economy, are often discussed
machinery, and other infrastructures. The current amount of
alongside technological changes.
physical capital available in the economy, or the stock of
United States Economic Growth
physical capital, impacts the economy’s productive
Policymakers generally use growth in real GDP—the total
capacity. For example, giving each member of a
value of economic output adjusted for inflation—as a
construction crew a set of tools allows them to produce far
measure of changes in economic growth across time
more than if they had to share only one set.
periods. Because of inflation, nominal GDP would tend to
rise over time even if the level of economic activity
The stock of physical capital in an economy is largely
remained flat. Therefore, real GDP is used to make more
dependent on the rate of investment in the economy.
accurate comparisons of economic growth over time.
Physical capital depreciates over time as machines break
down or become obsolete. Therefore, to maintain a certain
An alternative measure of economic activity is real GDP
level of capital stock, there must be sufficient investment in
per capita, a country’s real GDP divided by its population.
new capital over time to replace any depreciated capital.
For comparisons over time or across countries, real GDP
The higher a country’s investment rate, all else equal, the
per capita is often an improved measure of economic
faster its capital stock will grow.
growth because it accounts for differences in population.
Figure 2. Real GDP and Real GDP per Capita
Physical capital investment comes at a cost. Resources that
are diverted to investment in physical capital can no longer
be used to purchase present goods or services. Investment
in physical capital leads to greater economic activity in the
future, but less consumption of goods in the present. For
more investment information, see CRS In Focus IF11020,
Introduction to the U.S. Economy: Business Investment.
Human Capital
Just as increasing the amount of physical capital available
to workers can help the economy to grow, so can increasing
the amount of human capital. Human capital refers to the
skills, knowledge, and abilities of the workers within the

economy. As workers receive higher levels of education or
Source: U.S. Bureau of Economic Analysis (BEA).
training, they will tend to be more productive. This higher
Note: Data is presented in 2012 dollars.
level of productivity among workers increases the
productive capacity of the economy, and may spur
As shown in Figure 2, real GDP in 2017 was roughly 8.5
economic growth. Improvements in the productivity of the
times as large as it was in 1948. Real GDP per capita grew
labor supply are generally referred to as investments in
less than four times over the same period. Average annual
human capital.
growth rates for real GDP and real GDP per capita are
shown in Table 1.
Similar to investments in physical capital, investments in
human capital also face a tradeoff between current and
Table 1. Real GDP and Real GDP Growth Rates
future consumption. Consider an individual who is deciding

Real GDP
Real GDP per Capita
whether to attend a four-year college or to enter the
workforce immediately after high school. If he or she
1948-2017
3.2%
2.0%
chooses to attend college, he or she will likely be more
productive when entering the labor market after college, but
1948-1973
4.0%
2.5%
would forgo all of the consumption he or she could have
1974-1995
3.1%
1.8%
financed by working for those four years instead. In
addition to investments in human capital, increases in the
1996-2000
4.3%
3.1%
size of the labor supply can increase the productive capacity
2001-2017
2.0%
1.2%
of the economy, potentially leading to economic growth.
Source: CRS calculations using data from BEA.
Technology
Technological improvements and efficiency gains allow
(Note: Jeffrey Stupak, former CRS Analyst in
individuals to use the different factors of production in a
Macroeconomic Policy, contributed to this In Focus.)
more efficient manner, producing more, or improved, goods
with the same amount of resources. For example, the
Mark P. Keightley, Specialist in Economics
discovery of chemical fertilizer increased the productive
capacity of agriculture. Economists tend to use technology
IF10408
as a catch-all term for any changes that impact the


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Introduction to U.S. Economy: GDP and Economic Growth


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