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What is Economic Growth

What is Economic Growth

You may not know how economic growth affects you, or what it is for that matter, which isn't surprising, as we seldom take interest in things which don't affect us directly―not even when they affect us indirectly.
Abhijit Naik
In economics, economic growth is considered one of the most reliable signs of the nation's overall progress. The importance of this concept though, goes well beyond the economy of a nation. Employment and production are the two determinants of economic growth. Both have a crucial role to play for you as an individual. Everything works on the logic that more commerce will result in more jobs, more jobs will result in more consumption, and more consumption will result in more production, which will again generate more jobs. While the cyclic manner in which all these things work may seem simple, there is a lot more to know about it―especially how it affects your personal life.

Economic Growth

The term refers to the tool used to determine the overall progress of the said economy by taking into consideration the total amount of production of goods and services in the country over a stipulated period. Even though the concerned authorities keep a track of these developments on a daily basis, it is the quarterly or yearly figure which plays an important role in determining where the country is headed to. Many sources define economic growth as steady growth in the productive capacity of the economy, or an increase in any measure of aggregate income, such as the per capita Gross Domestic Product (GDP). One should also take into consideration the fact that it can be positive as well as negative. (The term is used even where the GDP decreases resulting in contraction of economy.) Interestingly, when an economy is experiencing negative growth, it is said that the economy is shrinking.

As we mentioned earlier, the economic growth measured over a quarterly or yearly basis is what is given utmost importance when monitoring the nation's progress. It is generally measured as the rate of change in real gross domestic product (GDP.) There are two methods by which this change can be measured: (i) nominal terms (which includes inflation) and (ii) real terms (wherein the figure is adjusted for inflation). If the GDP of a said economy increases from US$100 billion in the previous year to US$120 billion this year, the country is said to have experienced an economic growth of 20 percent. While that is an example of positive growth, an example of negative growth would be the decrease of GDP from US$100 billion to US$85 billion, which means that the country has experienced a negative growth of 15 percent. Such negative growth, especially when experienced over two quarters, is associated with economic recession.

Factors Responsible

An economy is subjected to cycles of economic growth―both, positive and negative, owing to various underlying factors. These factors range from the market condition in a country to some event of global importance. When interest rates go up, it deters consumers from buying those goods, which, in turn, affects the production of goods and economic growth of the economy in question. Similarly, government regulation on industries can also affect the production of goods and affect the growth. So can overall economic condition prevailing in the country, or the world for that matter. It has been observed time and again in the whole world, including the US, that an economy which has just come out of recession is defensive when it comes to overall consumption. People are afraid to spend and inclined to save money for bad times. This lack of interest in spending affects the production of goods and results in domino effect on the economy.

As an individual, you may not be keen on the production aspect of this economic concept, but the employment aspect is bound to grab your attention from the word go. At the end of the day, all the factors affecting economic growth work together for smooth functioning of the economy and fluctuations in any of these, can result in some serious implications on the economy as a whole.