To measure economic growth, we measure increases in the quantity of goods and services produced in the economy from one period of time to another. The Gross Domestic Product, or GDP, is commonly used to measure economic growth. The GDP is the dollar value at market prices of all final goods and services produced in the economy during a stated period.

Final goods are goods intended for the final user. For example, gasoline is a final good but crude oil, from which gasoline and other products are derived, is not. Before using GDP to measure economic growth, we must first adjust GDP for any price changes that have occurred. Let’s say GDP in Year 1 is $1,000 and in Year 2 it is $1,100. Does this mean the economy has grown 10% between Year 1 and Year 2? Not necessarily. If prices have risen, part of the increase in GDP in Year 2 will merely represent the increase in prices. We call GDP which has been adjusted for price changes real GDP; if it isn’t adjusted for price changes, we call it nominal GDP. To compute real GDP in a given year, use the following formula:

To compute real economic growth in GDP from one year to another, subtract real GDP for Year 2 from real GDP in Year 1. Divide the answer (the change in real GDP from the previous year) by real GDP in Year 1. The result, multiplied by 100, is the percentage growth in real GDP from Year 1 to Year 2. (If real GDP declines from Year 1 to Year 2 the answer will be a negative percent.) Here’s the formula:

For example, if real GDP in Year 1 = $1000 and in Year 2 = $1,028, then the economic growth rate from Year 1 to Year 2 equaled 2.8%: (1028 – 1000)/1000 = .028, which we multiply by 100 in order to express the result as a percentage.

In measuring real GDP and economic growth, it is usual to look at real GDP per capita. To do so, we divide the GDP of any period by a country’s average population during the same period. This procedure enables us to determine how much of the economic growth of a country simply went to supply the increase in population and how much of the growth represented improvements in the standard of living of the entire population. In our example, let’s say the population in Year 1 was 100 and in Year 2 it was 110. What was real GDP per capita in Years 1 and 2?

In this example, the average standard of living fell even though economic growth was positive. Developing countries with positive economic growth but with high rates of population growth often experience this condition.

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