Unit 1
Unit 2
Economic Growth
You have just seen that the economy is experiencing economic growth when we have more goods and services available for sale from one year to the next. The problem is that every economy on Earth is far more complicated than the simple example that we have just explored. They all make many different goods and services, and the exact number is almost impossible to count. This means that we can not rely on the simple system that we have just looked at – a more detailed examination of the topic is required.
To understand the measure of economic growth, you will need to be familiar with a new term. Gross Domestic Product is used to assess whether or not the economy has grown from one year to the next. If we break this down, it is easy to determine what this means:
Domestic: Made in Australia
Product: The value of goods and services produced
You should now be able to see that gross domestic product (or GDP, as you will often see it in the newspaper) is simply the total value of all goods and services produced in Australia in a certain period of time.
It is relatively easy for us to add up the value of everything produced in Australia over a year. The problem, as we discovered on the previous page, is that over time the value of the things that we are producing will increase. This will act to make the total value look bigger each year, even though we might be producing the same number of goods and services. Because of this fact, we need to manipulate the statistic that we generate to make it more useful.
Imagine the following situation. A country makes loaves of bread. In the first year they are able to make 100 loaves, and each one sells for $2. In the second year production has increased to 110 loaves of bread, and each one is now selling for $2.25. Has the economy grown? If so, by what rate has it grown?
If we do not manipulate the statistics, the change in GDP would appear as follows:
| Year | Output |
Value |
GDP at Market Prices |
| 1 |
100 loaves | $2.00 | $200.00 |
| 2 | 110 loaves |
$2.25 | $247.50 |
Using this data, we might conclude that the economy has grown by 23.75%. This figure is calculated using the following formula:
GDP at Market Price in Year 1
This gives us:
| 247.50 – 200 | x | 100 | = | 23.75% |
| 200 | 1 |
The problem is, we know that this figure is not accurate. As the price of bread in this economy has increased, the figure that we have calculated is too high.
 | Current Page: Measuring Economic Growth
|  |