Short-term stabilization and long-term growth

Economists draw a distinction between short-term economic stabilization and
long-term economic growth. The topic of economic growth is primarily concerned
with the long run like long term.
The short-run variation of economic growth is termed the business cycle, and
almost all economies experience periodical recessions. The cycle can be a
misnomer as the fluctuations are not always regular. Explaining these
fluctuations is one of the main focuses of macroeconomics. There are different
schools of thought as to the causes of recessions but some consensus- see
Keynesianism, Monetarism, New classical economics and New Keynesian economics.
Oil shocks, war and harvest failure are obvious causes of recession. Short-run
variation in growth has generally dampened in higher income countries since the
early 90s and this has been attributed, in part, to better macroeconomic
management.
The long-run path of economic growth is one of the central questions of
economics; in spite of the problems of measurement, an increase in GDP of a
country is generally taken as an increase in the standard of living of its
inhabitants. Over long periods of time, even small rates of annual growth can
have large effects through compounding. A growth rate of 2.5% per annum will lead to a doubling of GDP within 28 years, whilst a growth rate of 8% per annum (experienced by some Four Asian Tigers) will lead to a doubling of GDP within 9 years. This exponential characteristic can exacerbate differences across nations. For example, the difference in the annual growth from country A to country B will multiply up over the years. A growth rate of 5% seems similar to 3%, but over two decades, the first economy would have grown by 165%, the second only by 80%.
In the early 20th century, it became the policy of most nations to encourage
growth of this kind. To do this required enacting policies, and being able to
measure the results of those policies. This gave rise to the importance of
econometrics, or the field of creating measurements for underlying conditions.
Terms such as "unemployment rate", "Gross Domestic Product" and "rate of
inflation" are part of the measuring of the changes in an economy.
In mainstream economics, the purpose of government policy is to encourage
economic activity without encouraging the rise in the general level of prices
(in other words, increase GDP without creating inflation). This combination is
seen as, at the macro-scale (see macroeconomics) to be indicative of an
increasing stock of capital. The argument runs that if more money is changing
hands, but the prices of individual goods are relatively stable, then it is
proof that there is more productive capacity, and therefore more capital,
because it is capital that is allowing more to be made at a lower cost per unit.
(Adapted from en.wikipedia.org)