Economic growth

Economic Growth | Definition and Calculation

Economic growth

Economic Growth | Definition and Calculation

Economic Growth

We cannot talk about economic growth without talking about GDP. GDP is a measure of the market value of all final goods and services produced in a country during a given period. Economic growth generally measured on the basis of variations in GDP (Gross Domestic Product), economic growth reflects the increase in wealth (goods + services) produced during a given period (year, quarter).

The economic determinants playing a role in economic growth are: public expenditure (G), net taxes and duties (TN), exports (EX), imports (IM), consumption (C), investment ( I), income (Y), household savings (É).

GDP, directly related to the rate of economic growth, is equal to aggregate expenditure as well as aggregate revenue:

Y = C + I + G + (EX – IM)

The economic growth rate is the percentage change in the production of goods and services from one year to the next. This rate of economic growth makes it possible to compare economic and international well-being as well as to make forecasts on the evolution of the economic cycle. Here is the calculation of it:

Economic growth rate = [(Real GDP of the current year – Real GDP of the previous year) / Real GDP of the previous year] * 100

These are the main components of economic growth.

Traditionally, experts distinguish 2 types of economic growth

Intensive growth: this corresponds to the increase in the volume of production thanks to productivity gains, which does not necessarily have a positive impact on employment.
Extensive growth: it is defined by the creation of new companies, the growth of these new factors of production having a positive impact on employment.

Calculation of economic growth: annual GDP

Annual growth is measured by the year-on-year growth rate of GDP. This development determines the pace of growth.

GDP growth is calculated by adding the sum of added values ​​(public + private sector), VAT and the product of the various taxes (TIPP, etc.). Subsidies paid by the State are then deducted. The difference gives the change in GDP, expressed as a percentage.

GDP can be assessed in volume or in value. In value terms, the calculation does not take inflation into account (nominal GDP). But to get real growth, price increases need to be factored in. We then obtain GDP in volume (real GDP). Barring a period of deflation, it is always lower than nominal GDP (since it is reduced by inflation). The growth of GDP per capita is the indicator most frequently used to determine the degree of wealth of a population.

Note: to obtain the annual GDP, it is not necessary to combine the quarterly rates but to calculate the change in GDP between year N and the previous year.

Growth Calculation: Quarterly GDP

Quarterly growth reflects the level of production between 2 quarters. This quarterly GDP is particularly scrutinized by economists. It allows you to know if a country is in economic recession or not: a decline in GDP for at least 2 consecutive quarters means that a country is indeed in a recession phase, a period during which the economy shrinks.

Note: according to the National Bureau of Economic Research, a private American organization, the average duration of recessions since 1945 is slightly less than 1 year (+ or – 11 months).

The annual growth overhang corresponds to the GDP growth rate calculated by taking only the quarterly amounts already published (for example in Q3) as if growth were to be zero during the period remaining to complete the calendar year.

Note: The gross domestic product (GDP) spectrum is limited, as it does not take into account certain factors such as volunteering or the weight of the underground economy, i.e. activities prohibited or carried out by economic agents who do not have authorization: drug trafficking, cigarette smuggling, illegal practice of medicine, etc.

Is economic growth compatible with the preservation of the environment?

Economic activities, in particular production and consumption activities, have direct effects on the environment:

  • The depletion of natural resources, which will have short, medium and long-term impacts on the environment;
  • Damage to the environment due to greenhouse gas emissions;
  • The overconsumption of resources due to the increase in the world’s population.

Nevertheless, it is possible to reconcile economic growth and preservation of the environment by supporting the sustainable economy, and by establishing carbon taxes on the most polluting activities.

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What are the sources of economic growth?

They are essentially based on two factors:

  • The work factor which depends on the human factor and which makes it possible to determine the work capacity;
  • Capital accumulation. These include the self-financing capacity of companies;
  • The increase in productivity factors thanks to technical and technological innovation, which favors the labor factor;
  • The establishment of economic institutions to regulate the market and the interactions between the agents of economic life. In particular, the state plays an essential role through its economic policy.

Economic growth: Limitations

Growth is generally associated with job creation, an increase in the purchasing power of the population and a consolidation of public finances, since the creation of wealth translates into an increase in State resources (tax revenue , VAT, etc.).

Conversely, zero growth, in addition to its negative consequences on public finances, weighs on the labor market with chain effects on unemployment, household solvency (capacity to repay loans, etc.). However, some economists oppose the search for systematic growth, pointing out the ecological, demographic and social dangers it causes, although technological progress makes it possible to limit the effects of this production on the environment.

Parallel Economy Model (Black Economy) and Their Examples

Sources: CleverlySmart, PinterPandai, Investopedia, Science DailyTrading EconomicsInvestopediaWorld Bank

Photo credit: Orlandow via Pixabay

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