Definition of economic growth

Government and the Macro‑economy – Economic Growth

Objective: Definition of Economic Growth

Economic growth is the increase in the amount of goods and services produced by an economy over a period of time. It is usually measured by the rise in real Gross Domestic Product (GDP) or Gross National Product (GNP) and expressed as a percentage change.

Key Features of Economic Growth

• Occurs over the medium‑ to long‑term (usually measured annually).
• Measured in real terms, i.e., after adjusting for inflation.
• Reflects an increase in the economy’s productive capacity.
• Can be sustained by improvements in factors of production: labour, capital, technology and institutions.

How Economic Growth is Measured

The most common indicator is the growth rate of real GDP. The formula is:

Mathematically,

\$\text{Growth Rate}{t}= \frac{\text{Real GDP}{t}-\text{Real GDP}{t-1}}{\text{Real GDP}{t-1}}\times 100\$

Economic Growth vs. Economic Development

1. Economic Growth – quantitative increase in output (GDP).
2. Economic Development – qualitative improvement in living standards, health, education and environmental sustainability.

Factors that Contribute to Economic Growth

• Increase in the labour force (population growth, higher participation rates).
• Accumulation of physical capital (machinery, infrastructure).
• Technological progress and innovation.
• Improvement in human capital (education, skills).
• Effective institutions and stable macro‑economic policies.

Potential Benefits of Economic Growth

• Higher income per capita.
• Improved public services (health, education).
• Greater tax revenues for government.
• Reduced poverty and unemployment (if growth is inclusive).

Potential Drawbacks

• Environmental degradation if growth is not sustainable.
• Unequal distribution of income leading to social tension.
• Inflationary pressures if demand outstrips supply.