Economic growth is defined as a long-run process that results from the compounding of economic events over time. To measure economic growth, economists generally examine the rate of change in real GDP from one year to the next. The average annual rate of growth in the U.S. economy averaged between 3 and 3.5 percent during the twentieth century. Between 1960 and 2006, the rate of growth averaged 3.36 percent.
       Long-run economic growth does not occur at a steady rate over time. Short-run fluctuations in economic activity are commonly known as business cycles, which are composed of four distinct phases: expansion, peak, contraction, and trough. Because they are erratic, business cycles are hard to forecast. Significant expansions are referred to as economic booms, and significant contractions are called economic recessions.Historically, business cycles on average last about 60 months but have been getting longer over time because of prolonged expansions. Since 1960, the U.S. economy has completed six business cycles. A number of theories have been proposed to explain business cycles, including those based on expectations, innovations, inventories, monetary institutions, aggregate supply, and exogenous factors.
        Two sets of primary determinants of long-run economic growth have been identified: availability of economic resources and productivity factors. Greater quantities of labor and capital increase an economy's productive capacity and shift its production possibilities frontier outward. Investments in human capital and technology enhance the productivity of economic resources, which in turn leads to economic growth.
        Close examination of the recent history of real GDP in the United States indicates that the rate of economic growth has been diminishing over time. A number of factors may be contributing to this slowdown, including a technology slowdown, changes in the makeup of the labor force, a relatively low rate of savings, the changing composition of economic output, and government actions.
        Any change in the growth rate of the economy will have a great influence on the level of economic activity and per capita real GDP in the future. Public policies can be designed that enhance the determinants of economic growth identified in this chapter. By increasing the rate of economic growth, we can improve our own future standard of living.