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Economic growth and GDP
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Governments want the economy to grow, so that people are better off. Growth is measured using GDP.
What economic growth is
Economic growth is an increase in the output of goods and services in an economy over time.
It is measured by the increase in real gross domestic product (GDP): the total value of goods and services produced in a country in a year, adjusted for inflation.
Growth rate (%) = (GDP this year − GDP last year) ÷ GDP last year × 100
It is measured by the increase in real gross domestic product (GDP): the total value of goods and services produced in a country in a year, adjusted for inflation.
Growth rate (%) = (GDP this year − GDP last year) ÷ GDP last year × 100
Limitations of GDP
GDP does not show how income is shared: some may be much richer than others.
It ignores the population size: GDP per head (GDP ÷ population) is better for comparing living standards.
It leaves out unpaid work (such as caring) and the hidden economy (unrecorded cash work).
It ignores quality of life, such as pollution, working hours and leisure.
It ignores the population size: GDP per head (GDP ÷ population) is better for comparing living standards.
It leaves out unpaid work (such as caring) and the hidden economy (unrecorded cash work).
It ignores quality of life, such as pollution, working hours and leisure.
Effects of growth
Employment: more output needs more workers.
Living standards: higher incomes and more goods and services.
Poverty: can fall as jobs and incomes rise.
Productive potential: investment grows capacity.
Inflation: if demand grows faster than capacity, prices rise.
Environment: more production can mean more pollution and use of resources.
Living standards: higher incomes and more goods and services.
Poverty: can fall as jobs and incomes rise.
Productive potential: investment grows capacity.
Inflation: if demand grows faster than capacity, prices rise.
Environment: more production can mean more pollution and use of resources.
GDP rises from $500 billion to $520 billion. What is the growth rate?
- Change = 520 − 500 = 20
- 20 ÷ 500 × 100
Answer: 4%
Economic growth is a rise in real GDP. GDP ignores income distribution, population, unpaid work, the hidden economy and quality of life. Growth raises employment and living standards but may raise inflation and harm the environment.
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