Summary
Economic growth involves an increase in an economy's output and is measured by changes in real GDP. It is important to differentiate between growth in nominal GDP and real GDP, as well as to understand the causes and consequences of economic growth.
- Economic Growth — An increase in an economy's output over time. Example: A country's GDP rising from 550 billion in a year.
- Nominal GDP — GDP measured at current prices without adjusting for inflation. Example: If the GDP is $900 billion in 2017, it is nominal GDP.
- Real GDP — GDP adjusted for changes in the price level, measured at constant prices. Example: Using a price index to adjust nominal GDP to reflect true economic growth.
- Spare Capacity — Unused resources in the economy that can be utilized to increase output. Example: Factories operating below full capacity can increase production if demand rises.
- Opportunity Cost — The cost of forgoing the next best alternative when making a decision. Example: Investing in education may mean fewer resources for healthcare.
- Trickle-Down Effect — The idea that benefits of economic growth will eventually benefit all, including the poor. Example: Increased wealth for the rich leading to more jobs for others.
Exam Tips
Key Definitions to Remember
- Economic Growth
- Nominal GDP
- Real GDP
- Spare Capacity
- Opportunity Cost
Common Confusions
- Confusing nominal GDP with real GDP
- Assuming economic growth always leads to improved living standards for everyone
Typical Exam Questions
- What is economic growth? Economic growth is an increase in an economy's output over time.
- How is real GDP different from nominal GDP? Real GDP is adjusted for inflation, while nominal GDP is not.
- What are the causes of economic growth? Causes include increased consumer confidence, government actions, and improvements in resource quality.
What Examiners Usually Test
- Understanding of how economic growth is measured
- Differences between nominal and real GDP
- Causes and consequences of economic growth