Economic Growth

Measurement

Economic growth is measured using Real Gross Domestic Product, or Real GDP. This is a measure of the total volume of output in the economy for a given period of time. The Australian Bureau of Statistics (the ABS) defines GDP as the “unduplicated value of production that occurs in Australia in a particular period”. This definition recognizes that we are calculating only the value of finished goods and services in the economy. Work in progress that is sold from one company to another is deducted from the final measure of GDP, and as such is not counted twice; hence the term “unduplicated”.

Real GDP is calculated in Australia using the chain volume measure. Since 1998, the ABS has deflated the total value of output to be expressed in the prices of the previous year. In this way, one year can be compared to the next, and the actual increase can be established.

For example, let us say that in two consecutive years, the total output of a given economy was as follows:

If we did not deflate the statistic in year 2, then it would seem that the value of GDP has remained constant. As such, we may wonder why the standard of living of the people living in our country was actually declining.

The reality is that we have experienced inflation of 25% during year 2. As a result, the value of a car has moved from $100 to $125. To get an accurate picture of whether or not our economy has grown, we need to deflate this statistic so that the price is represented in the value expressed in year 1. To calculate the Real GDP in year 2, we can perform the following calculation:

And so in the situation outlined above, we would say that Real GDP is equal to $1000 divided by 1.25 (as the rate of inflation is 25%) which is equal to $800. At this point we can see that the value of each car is being expressed as the same amount they were worth in year 1. In other words, our economy has produced less in year 2 than we did in year 1.

In reality, the calculation of Real GDP using the chain volume measure is far more complicated than this. If you would like to read more about the full process for calculating Real GDP, try visiting this link. But don’t let the complex mathematics on that page put you off – you won’t be asked to calculate Real GDP in this manner on the exam!

The most significant thing about economic growth is that it must be sustainable. At the moment, it is believed that Australia can sustain an annual growth rate of between 3.5% and 4.5% increase in real GDP per year without any negative consequences for inflation or the balance of payments. As such, economists will usually use this as the goal range for growth in this country. However, the outcome which is expected by statistical bodies will vary each year. For example, the RBA now believes that the Australian economy can grow at between 2% and 3% each year. Forecasts published in the most recent Federal Budget suggest a rate of just over 3%, while international predictions suggest that the economy will grow at around 3.25%.

In other words, there is no fixed goal. All we can say with certainty is that it is desirable that the economy continues to grow, and that the benefits of this growth are shared equitably amongst the population. Any statement that you make about the goal for economic growth in Australia should be supported - you have to tell the reader whose goal you are using.

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