What economic growth is, and how it is measured
Economic growth is an increase in the output of goods and services an economy produces over a period of time, normally measured over a year.
- Gross Domestic Product (GDP)
- The total value of all goods and services produced in a country in a year.
- GDP per capita
- GDP divided by the population — the average output, and so roughly the average income, per person.
- Economic growth rate
- The percentage change in GDP from one year to the next.
- Recession
- A period of falling GDP, conventionally two consecutive quarters of negative growth.
GDP per capita is the more useful of the two measures, and knowing why is worth a mark on its own. A country's GDP can rise simply because its population has grown, without anyone being better off. Dividing by population strips that out, so GDP per capita is what allows a fair comparison between countries of different sizes, and shows whether the average person is actually gaining.
The calculation is straightforward: GDP per capita = GDP ÷ population. The growth rate is (change in GDP ÷ original GDP) × 100.
Worked example
A country's GDP rises from £500 billion to £515 billion. Its population rises from 50 million to 51 million. Calculate the growth rate and GDP per capita in both years, and comment.
- Growth rate: the change is £15bn on £500bn, so (15 ÷ 500) × 100 = 3%.
- GDP per capita in year 1: £500bn ÷ 50m = £10,000.
- GDP per capita in year 2: £515bn ÷ 51m = £10,098 (to the nearest pound).
- Compare the two: output grew 3% but population grew 2%.
- So GDP per capita rose by only about 1%, not 3%.
- State what that means for the average person.
Answer: The economy grew by 3%, but GDP per capita rose only from £10,000 to about £10,098 — roughly 1% — because the population grew by 2% at the same time. The country produced considerably more, but the average person is barely better off, which is why GDP per capita is the better guide to living standards.
Analysing GDP data is a skill the specification names, and papers give you a table or chart of recent or historical figures. Three things to do with it:
• Identify the trend — is growth rising, falling or steady over the period? • Pick out the anomalies — a year of negative growth is a recession and is worth naming • Use the figures — quote specific numbers and years rather than describing the shape in words
A falling growth rate is not the same as a falling GDP. If growth slows from 3% to 1%, the economy is still growing, just more slowly. GDP only falls when the growth rate is negative.
The determinants of growth
Evaluating growth
The judgement a strong answer reaches is usually about the kind of growth rather than growth itself. Growth built on investment, education and better technology raises output without exhausting resources, and can be sustained. Growth built on extracting and burning non-renewable resources raises GDP now at the cost of output later, and damages the environment on the way. So "is economic growth a good thing" is answered best by asking how it is being achieved, and who is receiving it.
One further limitation of GDP is worth knowing for evaluation: it measures output, not wellbeing. It counts the cost of cleaning up a pollution incident as output, and does not count unpaid work such as caring for a relative. A rising GDP therefore does not automatically mean people are better off.
Common mistake
Negative growth means GDP is falling. A fall in the growth rate from 3% to 1% is still growth — the economy is bigger than last year. Only a negative figure means the economy has shrunk.
Before you practise
- Economic growth is an increase in output of goods and services over time.
- GDP is the total value of goods and services produced in a year.
- GDP per capita is GDP ÷ population, and is the better guide to living standards.
- Growth rate = (change in GDP ÷ original GDP) × 100.
- Two consecutive quarters of negative growth is a recession.
- The determinants are investment, technology, workforce size, education and training, natural resources and government policies.
- Growth raises incomes, employment and tax revenue, but can bring inflation, inequality and environmental damage.
- GDP measures output, not wellbeing.
- A falling growth rate is not a falling GDP.