Industrial Organization

Reviewed by Annapoorna | Updated on Aug 27, 2020

What is Meant by Economic Growth?

An economic growth rate refers to the change in the value of all goods and services produced within a country for a specific period in comparison to an earlier period. It is depicted in terms of percentage.

The economic growth rate is a measure for knowing the relative health of an economy over time. The metric is usually collated and published quarterly and annually.

In maximum cases, the economic growth rate estimates the variance in a country's gross domestic product (GDP). The gross national product (GNP) may be used in all those nations with economies heavily dependent on foreign earnings. The GNP takes into account net income from foreign investments.

Understanding the Economic Growth

The economic growth is calculated with the help of the formula as given below:

Economic Growth= (GDP2 - GDP1)/GDP1

The formula denotes the percentage difference in the GDP between two periods.

When it is traced over time, the economic growth rate indicates the general tendency of a nation's economy and the size of its growth (or contraction). It may also be used to forecast the economic growth rate for the upcoming quarter or the year.

A jump in the economic growth rate is usually seen as a positive outcome. If an economy shows negative growth rates for two consecutive quarters, it implies that the nation is in a recession.

For example, if an economy downsizes by 2% from the previous year, it reveals that the total population has seen a reduction in earnings of 2% in that year.

Factors that Influence the Economic Growth

Various factors and events can influence economic growth. Most commonly, an increase in the demand for products would lead to a corresponding increase in production. It leads to more income in the net result.

Technological and innovative product developments can have positive influences on economic growth. Increase in demand from foreign markets leads to higher export sales.

In either or all of these cases, a more significant capital infusion causes an increase in the economic growth rate. An economic contraction is a reverse of that. In such a scenario, the consumers cut down their spending. So the demand and, in turn, the production falls with it. It has various repercussions, such as the production falls, people lose jobs, demand falls further, and the quarterly GDP number turns negative.