Chapter 26, Problem 1DQ

To determine

Measurement and the importance of economic growth.

Explanation of Solution

Economic growth is measured as a percentage rate of growth per quarter or per year. Generally, economic growth is measured in terms of either an increase in real GDP over some time period or an increase in real GDP per capita over a period of time.

The economic growth in terms of real GDP can be calculated by using the following formula

$\text{Growth rate of real GDP = }\frac{{\text{Real GDP}}_{\text{Present}}-{\text{Real GDP}}_{\text{Previous}}}{{\text{Real GDP}}_{\text{Previous}}}\times 100$ (1)

The economic growth in terms of real GDP per capita can be calculated by using the following formula:

${\text{Growth rate of real GDP}}_{\text{per capita}}=\frac{\left(\begin{array}{l}{\text{Real GDP per capita}}_{\text{Present}}\\ -{\text{Real GDP per capita}}_{\text{Previous}}\end{array}\right)}{{\text{Real GDP per capita}}_{\text{Previous}}}\times 100$ (2)

Economic growth is important because it helps to reduce poverty, protect the environment and cultivate art without harming the existing level of consumption and investment.

For a wealthy nation such as the United States, with a GDP in the neighborhood of $10 trillion, the 0.5 percentage point difference between 2.5 and 3.0 percent amounts to $50 billion a year (which is a very big amount). Therefore, the difference between a 2.5% and a 3% annual growth rate has great significance over several decades.

Economics Concept Introduction

Concept introduction:

Economic growth: Economic growth is defined as either a rise in real GDP over a period of time or a rise in real GDP per capita over a period of time.