How is an economy formed and why does it grow?

An economy is an interrelated system of human labor, exchange, and consumption. It forms naturally from aggregated human action–a spontaneous order, much like language. Individuals trade with each other to improve their standards of living. Improved standards of living are made possible when labor is more productive.

Productivity is driven by specialization, technological innovation, and working capital. The only sustainable way for an economy to grow is through increased productivity.

How is an economy formed?

An economy forms when groups of people leverage their unique skills, interests, and desires to trade with each other voluntarily.
 

People are financially rewarded based on the value others place on their productive outputs. They tend to specialize in that which will deems them most valuable.
 

Then they trade the portable representation of their productive value –money– for other goods and services. The total sum of these productive efforts is referred to as an economy.
 

Growing an economy

An individual laborer is more productive (and worth more) when they can more efficiently turn resources into valuable goods and services.
 

An individual laborer here includes everything from a farmer improving crop yields to a hockey player selling more tickets and jerseys.

Accordingly, economic growth can be defined as a whole group of economic actors who can produce goods and services more efficiently.
 

This is why economists are so concerned about productivity and efficiency. It's also why markets reward those who produce the most value in the eyes of consumers.
 

The most obvious is to have better tools and equipment, which economists call capital goods–the farmer with a tractor is more productive than the farmer with just a small shovel.
 

It takes time to develop and build capital goods, which requires savings and investments. Savings and investment increase when present consumption is delayed for future consumption.

The financial sector provides this function in modern economies.
 

The other way to improve productivity is through specialization. Laborers improve the productivity of their skills and capital goods through education, training, practice, and new techniques.
 

When the human mind better understands how to use human tools, more goods and services are produced and the economy grows. This raises the standard of living.
 

Source: Investopedia