Economic Growth & Recession
Government and the Macroeconomy
Economic growth is measured by the change in from one year to the next, expressed as a percentage.
Using real GDP matters. If a country's output is valued at current prices and prices rose by 5%, the figures would show growth even if the economy produced exactly the same goods. Adjusting for inflation gives real GDP, which reflects actual output.
A related figure is real GDP per head, which is real GDP divided by the population. This is mainly an indicator of living standards rather than a measure of growth itself: it shows the average output (and roughly the average income) per person. If a country's real GDP rises by 2% but its population rises by 3%, then GDP per head has actually fallen, and the average person is worse off even though the economy as a whole has grown. So when an examiner asks how economic growth is measured, the answer is real GDP; GDP per head answers a different question, about how living standards are changing.
Common exam question
Defining and measuring economic growth
Question: Explain how economic growth is measured (2 marks), or pick the indicator or definition that describes growth, or say why it is hard to measure where families live on their own crops (1 mark, multiple choice).
Asked in 1 of the 11 structured papers. The 2 marks are separate: one for real, one for what is measured, GDP (the country's output, income or expenditure). Leaving out "real" loses a mark, and GDP per head is not accepted in place of GDP: it shows living standards, not growth.
The same idea is set in 3 of the 13 multiple-choice papers. Growth is a rise in a country's output over time. The wrong options can rise for other reasons: the price level (that is inflation), consumption, total demand, wages and profits, or living standards. Where families eat most of what they farm, that output is never sold, so it goes unrecorded; the weather and low saving are not the reason.
Common exam question
Real growth from GDP and inflation figures
Question: From figures for GDP, real GDP or inflation, choose the country with the fastest real growth, the condition for real GDP to rise, or what a run of real GDP figures shows (1 mark, multiple choice).
Set in 3 of the 13 multiple-choice papers. Real growth is roughly the rise in nominal GDP minus the inflation rate, so real GDP rises only if nominal GDP outgrows prices. Nominal GDP up 12% with 9% inflation is real growth of about 3%; up 25% with 30% inflation is a real fall, despite the bigger headline. Nominal GDP outpacing the population or employment is a per-head or per-worker test, not the real one.
With real figures, any rise shows growth, but work out each rise before saying growth sped up: real GDP of 300, 312, then 318 is growth of 4%, then about 1.9%, so it slowed. Real GDP says nothing about inflation, and growth per head also needs the population.