Economic growth
Economic Growth
Economic growth is an increase in the capacity of an economy to produce goods and services,
compared from one period of time to another. It can be measured in nominal or real terms,
the latter of which is adjusted for inflation.
Traditionally, aggregate economic growth is measured in terms of gross national Product
(GNP) or gross domestic product (GDP). For example, take a look at the U.S. economy in the
1980s. After two economic contractions in the first three years of the decade, the economy
began to boom. Almost 19 million jobs were added over the decade, although unevenly.
Sectors such as manufacturing and mining lost jobs, but others, such as service and retail,
expanded rapidly. More women entered the workforce during the 1980s, too. This soaring
productivity plus a weakening dollar abroad helped U.S. companies meet the increased
demand for exports and revenue rose accordingly.
By the end of the decade, gross domestic product (GDP) had skyrocketed from $2.8 trillion in
1980 to $5.5 trillion by 1989.
Gross domestic product is the best way to measure economic growth because it takes into
account the country's entire economic output. GDP includes all goods and services that
businesses in the country produce for sale. It doesn't matter whether they are sold
domestically or overseas.
GDP measures final production. It doesn't include the parts that are manufactured to make a
product. GDP includes exports because they are produced in the country. Imports are
subtracted from economic growth.
The most accurate measurement of growth is real GDP, which removes the effects of
inflation. The GDP growth rate uses real GDP.
Gross National Product (GNP)
Gross National Product is closely related to Gross Domestic Product, or GDP. However, GDP is
a measure of all production activity within the borders of a country, whereas GNP is a
measurement of all production activity by a country’s citizens and domestic-owned
businesses. For example, Nigeria GNP takes into account Nigerian owned businesses
operating in other countries, and excludes foreign owned businesses operating within Nigeria.
GNP is commonly calculated by adding up the following:
Total personal consumption expenditures (PCE)
Gross private domestic investment (GDPI)
Total government expenditures
Net exports (total value of exports minus total value of imports)
Total income earned by citizens from overseas investments Subtract domestic income earned
by foreign residents.
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A large difference between GDP and GNP can indicate a strong involvement with international
trade, production, or financial operation.
Gross National Income (GNI)
Gross National Income (GNI) is the total amount of money earned by a nation's people and
businesses. It is used to measure and track a nation's wealth from year to year. The number
includes the nation's gross domestic product (GDP) plus the income it receives from overseas
sources.
It includes income sent back by citizens who are working overseas. That is a critical source of
income for many emerging market countries such as Mexico. Comparisons of GDP by country
will understate the size of these countries' economies.
The Use of Real Per Capita GDP
What this means is, as real GDP per capita rises, a country may also see related benefits.
As the figure increases, people’s longevity tends to march upward along with it. Citizens tend to
be better educated. Over time, growth in real GDP per capita also correlates to an increase in
income for the country’s poorest citizens.
However, GDP per capita, while useful, is not a perfect measure.
For example: GDP per capita is roughly the same in Nigeria, Pakistan, and Honduras. As such, you
might think the three countries have about the same standard of living.
But, a much larger portion of Nigeria's population lives on less than $2/day than the other two
countries.
This isn’t a question of income, but of income distribution—a matter GDP per capita can’t fully
address. In a way, real GDP per capita is like a thermometer reading—it gives a quick look at
temperature, but it doesn’t tell us everything.
It is common to use GDP as a measure of economic welfare or standard of living in a nation.
When comparing the GDP of different nations for this purpose, two issues immediately arise.
First, the GDP of a country is measured in its own currency: United States uses the U.S. dollar;
Canada, the Canadian dollar; most countries of Western Europe, the euro; Japan, the yen;
Mexico, the peso; and so on. Thus, comparing GDP between two countries requires converting
to a common currency. A second issue is that countries have very different numbers of people.
For instance, the United States has a much larger economy than Mexico or Canada, but it also
has roughly three times as many people as Mexico and nine times as many people as Canada. So,
if we are trying to compare standards of living across countries, we need to divide GDP by
population. If the per capita GDP of Canada is higher than that of USA, then we conclude that
and average Canadian enjoys higher standard of living than an average American.
Here are some questions based on the note about economic growth:
What is economic growth and how is it measured?
What is the difference between nominal and real terms when measuring economic growth?
How did the U.S. GDP change from 1980 to 1989, and what factors contributed to this growth?
What are the key differences between Gross Domestic Product (GDP) and Gross National Product (GNP)?
How is GNP calculated, and what factors does it take into account?
Why might there be a significant difference between a country’s GDP and GNP?
What is Gross National Income (GNI) and how does it relate to GDP?
How does real per capita GDP provide insight into a country's living standards?Real per capita GDP adjusts for inflation and divides the total economic output by the population, offering a clearer picture of the average economic well-being of individuals in a country.
What limitations exist when using GDP per capita as a measure of standard of living?
Why is it important to convert GDP to a common currency when comparing different countries?