Economic Growth
What is Economic Growth?
Economic growth is a sustained increase in an economy's real output, usually measured as the rise in real GDP or real GDP per capita.
It is shown by an outward shift of the production possibilities curve or a rightward shift of long-run aggregate supply. Sources include more capital, labor, and natural resources, plus better technology and productivity. Per-capita growth is the main driver of rising living standards.
Economic Growth: a worked example
Suppose an economy's real GDP rises from $8,000 billion to $8,360 billion over one year. The growth rate is (8,360 - 8,000) ÷ 8,000 × 100 = 4.5%. Now bring population in. If population goes from 200 million to 204 million, real GDP per capita starts at $8,000 billion ÷ 200 million = $40,000 per person and ends at $8,360 billion ÷ 204 million = $40,980. Per-capita growth is (40,980 - 40,000) ÷ 40,000 × 100 = 2.45%, close to the shortcut of subtracting the 2% population growth from the 4.5% output growth. Total output grew, but living standards improved at roughly half that pace. On a production possibilities diagram this is the entire curve shifting outward.
The mistake students make with economic growth
The tempting move is to call any rise in real GDP economic growth, including a recovery that simply puts idle workers and shuttered plants back to work. Closing a recessionary gap with a rightward aggregate demand shift carries the economy from a point inside the production possibilities curve out to the frontier it already had. Growth in the AP sense means that frontier itself moves: more capital, more labor, better technology, higher productivity. On a graph, show long-run aggregate supply shifting right, not just aggregate demand.
Economic Growth questions
How do you calculate the economic growth rate?
The growth rate compares real GDP across two periods: subtract the earlier period's real GDP from the later period's, divide by the earlier figure, then multiply by 100. Suppose real GDP moves from $500 billion to $515 billion. The calculation is (515 - 500) ÷ 500 × 100 = 3%. Use real GDP rather than nominal, so the answer reflects extra output instead of higher prices. For growth in living standards, run the same formula on real GDP per capita.
What is the difference between economic growth and economic development?
Economic growth measures a sustained rise in real output, usually tracked by real GDP or real GDP per capita. Economic development is broader and asks how that output translates into wellbeing: literacy, life expectancy, health care access, inequality, and sanitation. A country can post fast growth while development lags, for instance when gains concentrate in one sector or one region. AP Economics tests growth, but the distinction matters when a free response asks about living standards.
Why is economic growth measured with real GDP instead of nominal GDP?
Real GDP holds prices fixed at a base period level, so any change in it reflects a change in the quantity of goods and services produced. Nominal GDP moves with output and prices together, which means an economy producing exactly the same amount during 6% inflation would still post 6% nominal growth. Reporting that figure as growth would overstate what people can actually consume. Deflating nominal GDP by the price index strips inflation out before the growth rate is computed.
Formula / Example
This is the live Production Possibilities sandbox. Drag the curves, or open the full version.
Related terms
Common comparisons
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