Economic growth
AQA also says:
Spec content: The significance of economic growth; Causes, costs and benefits; Government policies to achieve growth.
Students should be able to understand: what is meant by economic growth and its significance; the difference between GDP, real GDP and GDP per capita; perform simple calculations with these measures.
What is Economic Growth?
Economic growth is an increase in the productive capacity of an economy — typically measured as the percentage increase in real Gross Domestic Product (GDP) over time. GDP is the total monetary value of all goods and services produced within a country in a given period (usually one year).
GDP, Real GDP and GDP Per Capita
GDP (nominal) measures output in current prices. It can rise either because real output increases or because prices rise (inflation). It is therefore an imperfect measure of genuine growth.
Real GDP adjusts nominal GDP for inflation, measuring the actual change in output volume. If nominal GDP rises 5% but inflation is 3%, real GDP growth is approximately 2%.
Real GDP growth (approx) = Nominal GDP growth − Inflation rate
GDP per capita divides total GDP by population — it measures average output (and hence approximate living standard) per person. A country can have high total GDP but low GDP per capita if it has a very large population.
GDP per capita = Total GDP ÷ Population
GDP per capita is a better measure of living standards than total GDP, but it still has limitations: it does not show how evenly GDP is distributed (inequality), and it does not capture non-monetary wellbeing (health, leisure, environment).
Significance, Benefits and Costs of Economic Growth
Benefits of growth:
- Higher average incomes → improved living standards
- More tax revenue for government → better-funded public services
- Lower unemployment — growing firms hire more workers
- Higher investment — optimistic firms invest in capital, raising future productive capacity
Costs/risks of growth:
- Inflation — if demand grows faster than supply, prices rise
- Environmental damage — resource use, pollution, carbon emissions tend to rise with output
- Inequality — growth benefits may accrue primarily to higher earners
- Current account deficit — faster growth sucks in more imports
Key Takeaways
- GDP: total value of output in current prices. Real GDP: GDP adjusted for inflation. GDP per capita: GDP ÷ population.
- Real GDP growth ≈ Nominal GDP growth − Inflation rate.
- GDP per capita is a better living-standards indicator than total GDP but does not capture inequality or wellbeing.
- Growth benefits: higher incomes, lower unemployment, more tax revenue. Costs: inflation, environmental damage, inequality.