Economic Growth

 Economic growth is the increase in value of the goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at "full employment," which is caused by growth in aggregate demand or observed output.

Economists draw a distinction between short-term economic stabilization and long-term economic growth. The topic of economic growth is primarily concerned with the long run.
The short-run variation of economic growth is termed the business cycle, and almost all economies experience periodical recessions. The cycle can be a misnomer as the fluctuations are not always regular.

The long-run path of economic growth is one of the central questions of economics; in spite of the problems of measurement, an increase in GDP of a country is generally taken as an increase in the standard of living of its inhabitants. Over long periods of time, even small rates of annual growth can have large effects through compounding (see exponential growth). A growth rate of 2.5% per annum will lead to a doubling of GDP within 28 years, whilst a growth rate of 8% per annum (experienced by some Four Asian Tigers) will lead to a doubling of GDP within 9 years. This exponential characteristic can exacerbate differences across nations. For example, the difference in the annual growth from country A to country B will multiply up over the years. A growth rate of 5% seems similar to 3%, but over two decades, the first economy would have grown by 165%, the second only by 80%.

Measuring growth

GDP increase since 1990, in major countries.

World map showing GDP real growth rates for 2007.

The real GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living.
However, there are some problems in using growth in GDP per capita to measure general well being.

• GDP per capita growth varies depending on the basket of goods used to deflate the nominal value or on the base year of measure.
• GDP per capita does not provide any information relevant to the distribution of income in a country.
• GDP per capita does not take into account negative externalities from environmental damage consequent to economic growth. Thus, the amount of growth may be overstated once we take environmental damage into account.
• GDP per capita does not take into account positive externalities that may result from services such as education and health.
• GDP per capita excludes the value of all the activities that take place outside of the market place (such as cost-free leisure activities like hiking).
• GDP per capita does not include activities of the informal sector of the economy in precise form. Only as approximate estimates.
• GDP per capita does not account for purchases on goods that were not produced in a given fiscal year, such as used cars or houses.
• GDP per capita does not provide any information about the appreciation or depreciation of goods already produced, which may reflect a change in standard of living. (dilapidation in residential buildings, for example)

Economists are well aware of these deficiencies in GDP, thus, it should always be viewed merely as an indicator and not an absolute scale. Economists have developed mathematical tools to measure inequality, such as the Gini Coefficient. There are also alternate ways of measurement that consider the negative externalities that may result from pollution and resource depletion (see Green Gross Domestic Product.)

Criticism

The real GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living.
Four major critical arguments are generally raised against economic growth:^[9]

1. Growth has negative effects on the quality of life: Many things that affect the quality of life, such as the environment, are not traded or measured in the market, and they can lose value when growth occurs.^{[citation needed]}
2. Growth encourages the creation of artificial needs: Industry cause consumers to develop new tastes, and preferences for growth to occur. Consequently, "wants are created, and consumers have become the servants, instead of the masters, of the economy."^{[citation needed]}
3. Resources: similar to the arguments made by Thomas Malthus, economic growth depletes non-renewable resources rapidly.^[10]
4. Distribution of income: growth may reinforce and propagate unequal distribution of income. The gap between the richest in the world and the poorest is growing.^[11]

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