Enter the real GDP (gross domestic product) of a country at two different points in time to determine the economic growth rate of that country.
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Economic Growth Formula
The following formula is used to calculate the economic growth of a country over time.
G =( GPD 2 - GDP1 ) / GDP1 *100
- Where G is the percentage of economic growth
- GDP 1 is the initial GDP ($)
- GDP 2 is the final or current GDP ($)
To calculate the economic growth, subtract the initial GDP from the final GDP, divide by the initial GDP, then multiply by 100.
Economic Growth Definition
Economic growth is defined as the increase or decrease in the total value of goods and services that a country produces over time.
Economic growth that is caused by an increase in population, which then leads to more goods being produced, is known as extensive growth.
Economic growth that occurs when the population is constant, which leads to an increase in GDP per capita, is known as intensive growth.
How to calculate economic growth?
- First, determine the GDP of a country at a previous time.
For this example, we will look at an arbitrary country of 5 years ago. The GDP is found to be $5,000,000,000,000.
- Next, determine the GDP of the same country of the past year or different but equal length time period.
In this example, the latest year saw a GDP of $6,000,000,000,000.
- Next, calculate the percentage of economic growth.
Using the formula, the economic growth is found to be 20%.
- Finally, determine if the growth was intensive or extensive.
In this example, the population also increased by 17% over the same time period, so the growth would mostly be extensive economic growth.
What causes economic growth?
There are 4 factors that can cause economic growth.
- An increase in the amount of physical capital goods in an economy. This is mainly the result of increased spending by people, or companies, in the labor force.
- An increase in the labor force itself. Increase the number of people that are working will increase the amount of goods and services that an economy can output.
- An increase in human capital. This is the process of people becoming better are their craft or job and improving productivity. In other words, as people get better at their job through various means like training, they are able to output more goods and services per day.
- The last method of economic growth is improvement in technology. This is generally considered improvements and discoveries that lead to better imrpovements in the overall production of a country. For example, the invention of the plane allowed for quicker transport of goods accross the globe.