What is economic growth?

Economic growth refers to a rise in the inflation-adjusted value of goods and services produced in a country, region or globally over time. It is typically measured as a percentage rate of growth in real GDP (gross domestic product).

GDP is a country’s total income accruing from output – the value of all goods and services produced over a specified period (usually 12 months).

Economic growth is the most fundamental gauge of an economy’s health – the rate at which national income is expanding.

Economic growth worldwideEconomic growth among the emerging and developing nations has been stronger than in the advanced economies. (Data Source: IMF)

Nominal vs. real economic growth

If economic growth is measured in nominal terms it means it has not factored in the inflation effect. If it is measured in real terms, it has been adjusted for inflation.

If you do not adjust for inflation, the figure could be misleading. If prices (inflation) rose by 7% in one year and the economy grew by 6% in nominal terms, it means it actually shrank (6% is less than 7%).

Economic growth may also be measured by using GNP (gross national product), which is the total output of a country’s citizens and companies, regardless of where they reside or work.

When an economy grows there is usually an improvement in the standard of living, or quality of life, of the people in that economy.

Too see how much better off each citizen is, economists look at GDP per capita (per capita income), which is GDP divided by the country’s population. If an economy grew by 10% in ten years and its population increased by 10%, GDP per capita would remain the same (see example below).

Imagine a country called Anglia had a population of 100 million and GDP was $5 trillion in the year 2000. Its GDP per capita in 2000 was $50,000. In 2010 GDP grew to $5.5 trillion, while its population increased to 110 million. GDP per capita in 2010 did not increase, it remained at $50,000.

Long-term economic growth matters

Long-term economic growth matters a lot, even if that growth is small each year. The British economy grew by an average of 1.97% in real terms between 1830 and 2008, despite several recessions, a depression, and two extremely costly World Wars.

In 1830, the UK’s GDP was ₤41.373 billion, and grew to ₤1.733 trillion by 2014. In a period of 178 years, the British economy expanded approximately 42-fold.

US economic growthThroughout most of the 20th century, economic growth in the United States was impressive. In 1929, GDP was $997 billion (in 2005 dollars) – the country had a population of 121.9 million and GDP per capita was $8,016. By 2008, GDP had hit $13.3 trillion, while GDP per capita had jumped to $43,714. (Data Source: PileusBlog.com)

China’s GDP growth

The most spectacular economic growth in recent history has been in China. From 1979 to 2010, its average annual GDP growth was 9.91%. In 1984, China’s economy expanded by a whopping 15.2%.

In 2015, China’s economic growth slowed down considerably. According to official estimates, GDP should grow by 7% in 2015, but most economists in North America and Europe believe the real figure will be considerably smaller.

German/Austrian ‘economic miracle’

Germany and Austria underwent a Wirtschaftswunder (German for ‘economic miracle’) following World War II. The expression was first used by the London based British national newspaper The Times in 1959.

In Germany, the Reichsmark was replaced with the Deutsche Mark as legal tender, and the Schilling was established in Austria. The two countries experienced a prolonged period of low inflation and rapid economic expansion, which in Germany was overseen by the then Chancellor Konrad Adenauer and Ludwig Erhard, his Minister of Economics.

Erhard became known as the ‘father of the German economic miracle’.

By the time the European Common Market was founded in 1957, Germany’s giant leap from a country in ruins to a prosperous and modern European nation contrasted with the struggling conditions still evident in the United Kingdom.

Video – Economic growth explained