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Many people believe that it is important that the economy grows every year. As a student of economics, it is your responsibility to know what this means, and what we will experience as the consequences of this assertion.

Economic growth can be defined as an increase in the real value of goods and services produced in the economy from one year to the next. In other words, we are aiming to have more goods and services available for sale every year.

The underlying assumption here is that if we have more products available then our standard of living will increase. For example, if we have ten million apples in Victoria one year, and then we are able to produce more apples in the following year, it suggests that more people will be able to choose to eat apples. If eating apples makes them happy, then their standard of living will increase.

The term “real value” needs further explanation. We will examine it by imagining the simplest possible example.

Our economy specialises in the production of watches. In year one, we were able to make twenty watches, and each one sold for $200. In the following year the workers in our economy also made twenty watches, but each one now sells for $220. Has the economy grown?

The answer is that the economy definitely has not grown. We have just as many products available for sale in year two as we had in year one. And yet we can see that the value of those watches has increased. The problem that we are having here is that we have not accounted for the increase in the price of watches which has been experienced in this economy.

Let’s consider a second example. Now imagine that our year one production is still twenty watches at $200 each, but in year two we are able to make twenty five watches, with each one selling for $220 each. Has the economy grown this time?

In this instance the answer is yes, but we will need to look at the calculation of economic growth to determine the exact rate.

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