Economic growth
Definition
Economic growth: an increase in a country's real gross domestic product (real GDP), the total value of goods and services produced, over a period of time.
Rising real output
- Output is captured by gross domestic product (GDP), the value of all goods and services produced in a country in a year.
- Economists track real GDP, which values that output at constant base-year prices to strip out inflation.
- A rise in real GDP therefore means the economy is genuinely producing more, not simply charging more.
Key Idea
- Economic growth is a sustained rise in real output over time.
- Real GDP is used because it removes the effect of rising prices.
Output, not prices
- Nominal GDP can rise simply because prices increase, even when output is flat.
- Real GDP holds prices at base-year levels, so any rise reflects extra goods and services.
- This prevents inflation from being mistaken for genuine growth.
Example
- In 2024 an economy made 110 cars at £10,000 each, up from 100 cars at £10,000 the year before.
- Real output rose 10%, so this is genuine economic growth.
- Had output stayed at 100 cars while each price rose to £11,000, measured GDP would also reach £1,100,000 yet real output would be unchanged.
A key objective
- Higher real output raises the volume of goods and services available per person, which tends to lift living standards.
- Governments therefore treat economic growth as one of their central macroeconomic aims.
- Growth is normally reported as the annual % change in real GDP.
Growth rate
Growth rate=ΔReal GDPReal GDP×100 \text{Growth rate} = \dfrac{\Delta \text{Real GDP}}{\text{Real GDP}} \times 100 Growth rate=Real GDPΔReal GDP×100Note
- At AS level, economic growth simply means a rise in real GDP over time.
- The fuller distinction between actual growth, using spare capacity, and potential growth, a rise in capacity, is developed at A Level.
Exam technique
- Always define growth as a sustained rise in real GDP over time.
- Stress that it is real output, not higher prices, that counts.
Common Mistake
- Do not treat a rise in nominal GDP caused by inflation as economic growth.
- Genuine growth requires real GDP to rise.
Self review
- Define economic growth.
- Which measure of output is used, and why real rather than nominal?
- How does a rise in output differ from a rise in prices?
- Why do governments treat growth as a key objective?
