Economic Growth

Measuring economic growth

- Economic growth is usually measured by the annual percentage change in real GDP. Real GDP can be calculated by totalling up the output, income or expenditure of the country.

- It is important to avoid double counting, that is, counting the same output twice. For instance, it is important not tocount the output of raw materials and then include them again in the finished products.

- In the income method, only incomes that have been earned in return for providing goods and services are included. Transfer payments are not.

- With the expenditure method, it is important to remember to include exports and to exclude imports.

Production and productivity

Production is what is produced. So, when real GDP increases, it means that output has risen. Labour productivity is output per worker hour. 

- If productivity rises by more than a wages, then labour costs will fall and a country can become more price competitive.

- When an economy is expanding, production will rise. If less skilled workers have to be recruited to make the extra output, productivity may fall.

Difficulties in interpreting changes in real GDP

- A rise in output may be exceeded by a rise in population.

- The existance of informal economy. This is unrecorded economic activity. Its existance means that the country's output is higher than official real GDP figures suggested. 

- Informal economy distorts a range of economic data. Official measures overstate inflation, understate real GDP, as well as employment.

- An informal economy can also result in lower productivity. Firms in…