Measuring Economic Growth

Economic growth is the increase in the amount of the goods and services produced by an economy over time. A positive change in the level of production of goods and services by a country over a certain period of time. Nominal growth is defined as economic growth including inflation, while real growth is nominal growth minus inflation. Economic growth is usually brought about by technological innovation and positive external forces.

How do we measure the economic performance of developed and developing countries?

Economic growth is measured in two main ways — as an increase in real GDP(Gross Domestic Product) or as an increase in potential GDP. The first is easy to measure, and is the most readily available data on websites such as http://www.imf.org/external/country. By contrast, the increase in potential GDP is a very useful measure of how the economy is performing relative to its capacity constraints and its use of resources, and ignores the possibility that some of the resources might be unused at the time of measurement.

It is of major importance to measure growth accurately, one reason being that growth is an indicator of the success of current economic policies and a guide to future ones. Growth figures also influence consumer borrowing or saving and business investment, so inaccurate figures might mean that inappropriate levels are chosen. Growth figures also influence the confidence in the domestic economy held by the global economy, and therefore affects flows of investment funds (known as foreign direct investment) and ‘hot money’ (short term speculative flows of cash chasing high interest rates and potential currency changes).

However there are many problems with the growth measures that we use. An economy might be growing quickly but this may mean that the income gap is widening and causing problems of relative poverty. There maybe increases in other problems alongside economic growth. There maybe more pollution, congestion, number of hours worked, stress levels — all these can contribute to worsening living standards even for those whose incomes are rising.

Another problem is the difficulty of comparing growth in different countries and over different time periods. Some economies consume much of what they produce meaning that the true value of the output is not reflected in the GDP figures. This is important if we are trying to measure which countries need economic assistance.

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