Learn all about economic growth in just a few minutes! Professor Jadrian Wooten of Penn State University explains economic growth and how to calculate rates of growth.
Economic growth occurs when a nation's output is increasing over time.
When an economy grows, it increases its ability to produce goods and services. Not all goods and services are valued equally, so this ability must be measured by the value of products produced, not just the volume. Gross domestic product (GDP) measures the monetary value of final goods and services produced within a country in a specific period of time. Real gross domestic product (real GDP) is the value of GDP in constant dollars, meaning that the value of the dollar has already been corrected for inflation and therefore reflects the same ability to purchase goods and services. Economic growth is the rate of increase in real GDP from one year to the next. It occurs when a nation's GDP rises over time; it is a long-term trend as opposed to short-term fluctuations in economic output. It is generally measured as the growth rate of real GDP from one year () to the next (). For example, if the real GDP in the United States increased from $33 billion in 1998 to $34.5 billion in 1999, then it increased by $1.5 billion. Then the rate at which real GDP grew would be .
It is important to use real GDP to measure economic growth because real GDP shows that the actual output, goods or services produced within a given time frame by a business or country, has risen. An increase in nominal GDP (the total gross domestic product expressed in current year prices) might mean that output has risen, but it could also mean that prices have gone up instead. Therefore, prices must be held constant when looking at output over time. A positive economic growth rate means that a country had an increase in its real GDP, while a negative growth rate means that output fell. Since 1930 the economic growth rate for the United States has averaged 3.3% per year, but the rate itself has varied dramatically, from to a low of –12.9% in 1932 (during the Great Depression) to a maximum of 18.9% in 1942 (during the height of World War II). Since the Postwar period, the economic growth rate for the United States has become more stable, relatively speaking. There have been no large spikes or dips in the growth rate because there have been no wars or economic crises of the same scale, and the development of new industries and increased worker productivity have led to consistent growth. It is also possible to compare growth rates across countries and see the effects of different economic strategies. For example, in 2016 India had a growth rate of 7.1%, which has been attributed to a sharp increase in investment and increased worker productivity. During that same time period the United States, which has a more established economy and therefore does not see the same scale of fluctuations, experienced only 1.6% growth. Brazil, however, had a growth rate of –3.6% because of a series of scandals in the public and private sectors and high inflation that caused economic uncertainty.