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Economic Growth

Summary

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The real gross domestic product (GDP) growth rate since 1970 has averaged around 3% per year. Over the last 30 years this corresponds to a 242% increase in the real GDP. The economy has clearly grown during this period. Interestingly, the actual year-to-year growth rate of real GDP is highly inconsistent. In 1985, real GDP grew by almost 7%. But in 1982, just a few years earlier, it fell by nearly 2%. There are evidently many factors that affect how the economy grows over time. But what makes the economy grow? Why does the economy grow at different rates, seemingly in fits and starts? What affects how the economy grows over the long term?

When the economy grows, what happens to the standard of living? If price levels increase significantly, then the nominal GDP may increase but the real GDP is unchanged. For economic growth to be helpful to the population, the price level must remain relatively unchanged. In other words, the real GDP must increase. When the economy can grow significantly and inflation is held stable, the increased income is spread to the population. This often results in an increase in the standard of living. An increase in the standard of living entails that people are better off because they have more money to spend on goods and services sold at a relatively stable price level. What are the factors that lead to an increased standard of living? How are increases in the real GDP spread to the population?

When a number of economies are examined over time, an interesting phenomenon becomes evident. Groups of countries seem to converge in terms of real GDP per capita. Instead of the rich getting richer and the poor getting poorer, in terms of economies, similarly organized economies approach one another in the long run. What are the factors that allow this to occur? How can an economic advisor help a country to converge with others?

This SparkNote will cover the topic of economic growth. Within and between economies, economic growth is very important because it directly affects the wellbeing of the people involved in these economies. This SparkNote will introduce the important factors in economic growth over time as well as in the phenomenon of convergence. Through a grounding in these subjects, a better understanding of how the economy grows over time is within reach.

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