Measuring growth
Definition
Economic growth rate: the annual percentage change in a country's real gross domestic product (real GDP).
The growth rate
- Using real GDP rather than nominal GDP removes the effect of inflation, so the figure reflects extra output.
- A positive figure means output rose, while a negative figure means the economy shrank, as in a recession.
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×100Example
- Suppose real GDP rises from £500bn to £515bn over a year.
- Real output rose 3%, so the economy grew by 3% that year.
Total versus per capita
- Total real GDP measures the size of the whole economy's output.
- Real GDP per capita divides total real GDP by the population, giving output per person.
- Per capita figures are the better guide to average living standards, because population can also change.
Real GDP per capita
Real GDP per capita=Real GDPPopulation \text{Real GDP per capita} = \dfrac{\text{Real GDP}}{\text{Population}} Real GDP per capita=PopulationReal GDPExample
- Suppose real GDP is £515bn and the population is 50 million.
- Output per person is £10,300.
- If total GDP grows 3% while population grows 1%, output per person rises only about 2%, so living standards improve more slowly than headline growth suggests.
Reliability of data
- Accurate growth figures depend on reliable output and price data.
- Unrecorded activity, such as the informal economy, can understate true output.
- Figures are often revised as fuller data arrive, so early estimates should be treated with caution.
Exam technique
- State that growth is the % change in real GDP.
- Use per capita figures whenever the question is about living standards.
Common Mistake
- Do not measure growth using nominal GDP, as that includes inflation.
- Do not ignore population, since total GDP can rise while output per person falls.
Self review
- How is the economic growth rate calculated?
- Why is real GDP used rather than nominal GDP?
- What does real GDP per capita adjust for?
- How can total GDP rise while living standards fall?
- What does accurate measurement depend on?
