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Economic Growth Explained

Quick Definition: Economic growth is when a country’s production of goods and services increases over time.

What is economic growth?

Economic growth is often defined as an increase in a country’s output i.e. the production of goods and services. However, economic growth is also sometimes described as an increase in average incomes and standard of living.

Economic growth is commonly measured by a country’s gross domestic product (GDP) which is the total value of the goods and services produced during a set period of time. However, there are other measurements of economic growth as we shall see in the section below.

What are the different measures?

  • Gross domestic product (GDP) – This is the most common measure of economic growth. It is the total value of all goods and services produced in a country’s economy during a set period of time. There are two ways of measuring GDP, nominal GDP and real GDP. Nominal GDP calculates the value of all the goods and services produced during a set period of time using current prices. Real GDP involves calculating the value of all the goods and services produced during a set period of time using constant prices. Economists usually use real GDP when calculating economic growth in a country because it takes inflation into account.
  • Gross national product (GNP) – This is a similar measurement to GDP. GNP is the total value of all the goods and services produced by a country’s own citizens during a set period of time. This means that it excludes the value of production from foreign firms and citizens but includes the value of production from firms and citizens who are overseas. Just like GDP, GNP can be measured in nominal terms which uses current prices or in real terms which accounts for inflation.
  • Per capita – Many measures of economic growth such as GDP and GNP can also be measured in per capita terms. Per capita is simply a measurement of economic growth per person. Therefore, GDP per capita is the total value of all the goods and services produced in a country during a set period of time divided by the total population of the country. Per capita is useful because it shows whether or not output is increasing per person.
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Gross Domestic Product (GDP) Explained