Economic growth is an increase in real GDP: the value of output after removing the effect of price rises.
Economic growth is an increase in the output of goods and services in an economy over time. It is measured by the change in real Gross Domestic Product (GDP).
GDP is the total value of all goods and services produced in a country in a year. Nominal GDP uses current prices, so it rises when prices rise even if output does not. Real GDP removes the effect of inflation, so it shows the change in actual output.
The growth rate is the percentage change in real GDP from one year to the next.
If nominal GDP rises by 5% and prices rise by 3%, real GDP rises by about 2%. Only that 2% is extra output.
- Economic growth
- Increase in real GDP over time.
- GDP
- Total value of goods and services produced in a country in a year.
- Real GDP
- GDP adjusted to remove the effect of inflation.
Worked example: Calculating a growth rate
Suppose a country's real GDP rises from $400 billion to $412 billion in a year.
- Change in real GDP = 412 - 400 = $12 billion.
- Growth rate = 12 / 400 x 100 = 3%.
- This means the country produced 3% more goods and services than the year before.
- If the figures had been nominal, part of the rise could just be higher prices.
Watch out for this
If GDP measured in current prices rises, the economy must be producing more.
Nominal GDP can rise just because prices rose. Real GDP removes inflation and shows whether output really increased.
Check your understanding
Nominal GDP rises by 6% and prices rise by 6%. What happened to real GDP?
- It stayed about the same.
- It rose by 6%.
- It rose by 12%.