Unit 1
Unit 3
Economic Growth
Definition
Let's start with a simplified definition - economic growth will occur when more goods and services are sold in the country this year than were sold last year. By having more options, it is hoped that we will achieve a higher standard of living. As such, it is the volume of goods and services that interests us, not the value of those goods and services.
For example, imagine that we produce televisions. In one particular year, our economy is able to produce 5 televisions. Each television sells for $500. As a result, we would say that our GDP is equal to $2,500. However, in reality we know that our GDP is actually five televisions. The difference is quite significant.
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5 televisions |
| $500 | $500 | $500 | $500 | $500 | $2,500 |
In the following year, imagine that we are only able to access enough resources to make four televisions. However, due to a problem with inflation, the price of a television has now increased to $800. Our GDP would now be $3,200. But, once again, we are aware that our actual GDP is four televisions. That is, the number of televisions that we have been able to complete has gone down. Therefore, despite the price increase we would have to say that our GDP has decreased.
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4 televisions | |
| $800 | $800 | $800 | $800 | $3,200 | |
This example is fine if all we are making is a small number of items. The problem is, no economy in the world works this way; everything is far more complex. There is absolutely no way in which we could count up the number of goods and services sold in Australia each year. As a result, we must change our definition of economic growth so that it can be assessed. From now on, you should define economic growth as an increase in the real value of goods and services produced in a country from one year to the next.
On the next page we will explore a different example that will allow you to see the way in which adjustments are made to this calculation so that the change in real value can be assessed.
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