Summary
Economic growth refers to an increase in an economy's output, often measured by the change in real GDP. It is important to distinguish between nominal GDP, which is not adjusted for inflation, and real GDP, which is adjusted to reflect true economic performance.
- Economic Growth — an increase in an economy's output. Example: A rise in GDP from one year to the next.
- Nominal GDP — GDP measured at current prices without adjusting for inflation. Example: GDP calculated using the prices of the year in which the output is produced.
- Real GDP — GDP adjusted for changes in the price level, reflecting true economic performance. Example: GDP calculated using constant prices from a base year.
- GDP per Capita — a measure of output per person in the economy. Example: Total GDP divided by the population size.
- Trickle-Down Effect — the idea that benefits of economic growth will eventually benefit all layers of society. Example: Increased wealth at the top leading to more jobs and income for lower-income groups.
Exam Tips
Key Definitions to Remember
- Economic Growth
- Nominal GDP
- Real GDP
- GDP per Capita
Common Confusions
- Confusing nominal GDP with real GDP
- Assuming economic growth always leads to improved living standards for everyone
Typical Exam Questions
- Discuss two problems of comparing the economic growth of the UK and developing economies using GDP as a measure? GDP may not account for differences in income distribution or informal economies.
- Analyse why governments borrow and why it is said that a government should increase spending in a recession? Governments borrow to finance deficits and stimulate the economy during downturns.
- What may reduce economic growth in the short run but increase it in the long run? An increase in the savings ratio.
What Examiners Usually Test
- Understanding the difference between nominal and real GDP
- The causes and consequences of economic growth
- The impact of economic growth on living standards and income distribution