The real gross domestic product (GDP) growth rate since 1970 has averaged around
3% per year. Over the last 30 years this corresponds to a 242% increase in the
real GDP. The economy has clearly grown during this period. Interestingly, the
actual year-to-year growth rate of real GDP is highly inconsistent. In 1985,
real GDP grew by almost 7%. But in 1982, just a few years earlier, it fell by
nearly 2%. There are evidently many factors that affect how the economy grows
over time. But what makes the economy grow? Why does the economy grow at
different rates, seemingly in fits and starts? What affects how the economy
grows over the long term?
When the economy grows, what happens to the standard of living? If price
levels increase significantly, then the nominal GDP may increase but the
real GDP is unchanged. For economic growth to be helpful to the
population,
the price level must remain relatively unchanged. In other words, the real GDP
must increase. When the economy can grow significantly and inflation is held
stable, the increased income is spread to the population. This often results in
an increase in the standard of living. An increase in the standard of living
entails that people are better off because they have more money to spend on
goods and services sold at a relatively stable price level. What are the
factors that lead to an increased standard of living? How are increases in the
real GDP spread to the population?
When a number of economies are examined over time, an interesting phenomenon
becomes evident. Groups of countries seem to converge in terms of real GDP per
capita. Instead of the rich getting richer and the poor getting poorer, in
terms of economies, similarly organized economies approach one another in the
long run. What are the factors that allow this to occur? How can an economic
advisor help a country to converge with others?
This SparkNote will cover the topic of economic growth. Within and between
economies, economic growth is very important because it directly affects the
wellbeing of the people involved in these economies. This SparkNote will
introduce the important factors in economic growth over time as well as in the
phenomenon of convergence. Through a grounding in these subjects, a better
understanding of how the economy grows over time is within reach.
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