Economic Growth
Written by Arsen Ashlayev | Proofread by Yasmin Uzykanova
Introduction
Economic Growth can be defined in economic studies as the increase in the production of a country’s economic goods and services over time. Economists often use economic Growth to evaluate a country’s performance in terms of economic output and compare the standards of living between countries. Economic Growth can be measured in various ways, including nominal and real terms, with the latter considering inflation. More often than not, aggregate economic Growth is measured in terms of Gross Domestic Product (GDP) and Gross National Product (GNP). However, other measurement tools, such as the Gross National Income (GNI), are also used based on the given economic context.
Understanding of Economic Growth
In brief terms, Economic Growth is the increase in the aggregate (total) production of economic goods and services in an economy, which is typically expressed as a rise in national income. Aggregate output increase is often correlative with increased marginal productivity, which commonly results in a surge in revenues, encouraging the consumers to increase their spending, which in most cases suggests an increase in living standards.
The standard driving force behind economic growth would usually be modeled as an increase in the quantity along with the quality of the working age population (labor force), materials they require to manufacture with (raw materials), as well as advanced technology (capital). All of the factors listed will, ceteris paribus, lead to an increase in economic output.
Stages of Economic Growth
The economy moves through different periods of economic activity. This movement is called the “business cycle,” consisting of four distinct phases:
Expansion: Income, industrial production, sales, and real GDP increases characterize this stage.
Peak: The stage in the economic cycle when the economic expansion hits its ceiling. It is effectively a turning point in the economy.
Contraction: During this stage in the economy, the aspects of an economic expansion all begin to decrease. It becomes a recession when a significant decline in economic activity spreads across the economy over an extended period (2 consecutive quarters of a year)
Trough: The stage in the “business cycle” when the contraction in the economy hits rock bottom. Each business cycle is dated from peak to peak or trough to trough. Such processes generally are not extensive in length, and there are occasional periods of contraction during an expansion and vice versa.
Metrics of Economic Growth
The performance of an economy can be evaluated and assessed through a variety of methods, including:
Nominal Gross Domestic Product: total value of all goods and services produced in a country, not adjusted for inflation
Real Gross Domestic Product: total value of all goods and services produced in a country, adjusted for inflation
Real per capita income allows us to compare the standard of living of individuals within each country.
Other metrics include:
Purchasing power parity (PPP): measures the total amount of G&S a single unit of a country’s currency can buy in another country. (Price of a basket of comparable goods and services in different countries). When PPP is high, a country’s currency can buy more, indicating a higher standard of living. Makes a more accurate comparison than GNI or GNP.
Gross National Product (GNP): the value of all goods & services produced by domestic businesses both at home and abroad (includes overseas assets)
Gross National Income (GNI): total level of income generated by its citizens over some time (GDP + income earned by nationals living abroad - income earned by foreign nationals living in the country)
GNP and GNI can be divided by the total population to get the measurement in per capita (per person) terms.
GNI can have limitations as a comparison, as many jobs in LICs (Lower Income Countries) are informal, meaning they are not given a financial record, indicating less efficient data.
