What Is Economic Growth?
What exactly is economic growth that we humans strive so furiously for? What is that makes little green dollar signs pop up in our minds that fuels economic expansion? In short, economic growth can be defined as an increase in the “value” of the total goods and services a region produces during a certain time period as compared the value of goods and services produced by the same region over a previous time period.
Gross Domestic Product
Economic growth is usually measured using gross domestic product (GDP), although sometimes gross national product is used. Gross domestic product is the value on an international market of all the goods and services a country produces within a given time, usually a year, which is similar to the definition above.
Growth with Inflation
Obviously, you would think that if the value of these goods or services produced in a region goes up from the first time period to the second, then that region would experience economic growth. That's true, but it is not exactly the full story. The first complicating factor is inflation. The value of goods and services may have increased, but inflation may have also increased. If a region produced $100,000 worth of goods and services in 2010 and produced $110,000 worth of goods and services in 2011, then it experienced economic growth. Specifically, it experienced 10 percent growth. That's quite high!
However, to get a better sense if there truly was growth, you have to factor inflation or by expressing the value constant dollars. Let's say using the example above that from 2010 to 2011 the region also experienced 3 percent inflation. So, with 3 percent inflation, $100,000 worth of goods and services in 2010 actually cost $103,000 in 2011. That would mean that the cost of goods became more expensive and there less true economic growth. Specifically there would be 7 percent economic growth. In the U.S., inflation is reflected (for consumers) is reflected by the consumer price index.
Growth Per Capita
The next complicating factor to economic growth is that it should ideally be calculated on a per capita basis. That, you need to figure out much the economy grew per person. The economy may grow a lot on an absolute scale, but what does it mean per person? Are people getting richer or poorer? Again, using the example above, let's say that from the same 2010 to 2011 period where the total value of goods produced increased from $100,000 to $110,000 while there was 3 percent inflation; let's also say the region has 100 people and factor in 2 percent population growth between 2010 and 2011. With 102 (100 * 1.02) people in 2011, you have to divide the post-inflation value of goods and services in 2011 by the population. That would be ($107,000 / 102) - ($100,000 / 100). That would give us a GDP per capita of $1,000 in 2010 and a GDP per capita of $1,049 in 2011, a 4.9 effectual percent increase in GDP.
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