Economic growth

Arguably one of the most used terms in economics, ‘economic growth’ is a term that just about everyone is at least remotely familiar with, even if they have no studied economics at all. Sometimes it seems everyone knows what economic growth is. Politicians use this term all the time, and so do teachers, managers and even preachers. Often, people’s use of this term may not be quite accurate, but one has to admit that most of the time they are never too far from the mark. In a nutshell however, an economists’ description of economic growth is very precise: Economic growth is a positive change in the output, or production, of a country or an economy. This description involves all aspects of an economy, from profits to taxes and wages, to such things as production rates.


Considering the above description, it turns out that the only way of ascertaining economic growth would be to calculate it as a numerical value. Therefore, economic growth can be calculated as a percentage increase in the Gross Domestic Product of a given economy. This is done by finding out the previous year’s GDP and finding the ratio between the current and the previous GDP.

Economic Growth
Economic Growth

However, the above calculation in itself may not reflect the real situation in the given economy. There is need to consider an important factor in economics: Inflation. Inflation has a bearing on product prices as well as level of production, and consequently, it also affects economic growth. Calculations such as the one above, which is done without consideration of inflation rates, result in a value of economic growth called normative economic growth. To get more accurate values, one would have to take the value of normative growth and subtract the rate of inflation. The resulting value of economic growth is much more accurate and can be referred to as real economic growth.

Positive economic growth signals a wealthier economy, and increased prosperity. There is increased production, which means increased profits for the production companies. Increased production also translates to increased tax collection for the government and, reduced unemployment levels, and better prospects for the economy.

Economic Growth Formula
Economic Growth Formula

One of the key contributors to economic growth is technology. Improved technology leads to increased production, which means more wages and more profits for employees and investors respectively. Changes or advancements in technology have been credited with much of the steps that the world economy has made so far. Another contributor that is perhaps worth taking note of would be globalization. Globalization has led to expanded markets, more opportunities for employment as well as investment, and more efficiency due to competition.

But economic growth, good as it may be, is also not without its fair share of adverse effects. The prominent one of these adverse effects is environmental degradation.  Since most of the raw materials used in wealth creation for economic growth are non-renewable, it is inevitable that with increased growth, the world is slowly being depleted of its resources. This trend is a cause for concern both for economists and for others.

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