What Is Economic Growth?
What is economic growth? Economic growth is the improvement or increase in the prevailing price level of goods and services made by an economy over a period of time. economists conventionally measures such growth as the percentage of increase in national income, or gross national product, relative to the level of time. It is the difference between total income and total expenditure, expressed as a percentage of the gross national product. This measure of change in prices is called change in gross national income.
The concept of economic growth is extremely important for a country’s prosperity. A country’s level of economic growth has profound effects on its international rankings, foreign exchange rates, and domestic policies. The level of economic growth has significant effects on employment rates, inflation, interest rates, and other macroeconomic variables. For example, an increasing level of GDP leads to more investment in infrastructure, technology, and research and development. An increase in economic growth also increases international competitiveness, and increases the share of exports in total revenue.
There are three broad categories of economic growth: physical growth, institutional growth, and intellectual capital. Physical growth refers to improvements in the quality and capacity of physical capital such as buildings, infrastructure, and vehicles. Institutional growth covers changes in the formal system of rules and procedures for production, trading, and financing. Intellectual capital refers to the intangible assets such as knowledge, skills, and proprietary information.
Growth in output per unit of inputs (OPI) is the amount of value added per input in relation to existing inputs in production process. Inputs are the things that make the output possible, and which are measured in monetary units. Output is the value created from the output of inputs that is measured in terms of value units. The concept of economic growth is associated with the concept of efficiency or effectiveness of the process of production. The efficiency of a production process can be measured by the ratio of output per input, which is referred to as a productivity rating.
Measuring output per input can sometimes be difficult because of the variety of different measures used, and changes in value perceptions between countries. An alternative approach is to measure output of particular economic goods within a country, and than look at the performance of those goods against other goods in the economy. Purchasing power parity or the price index measures value in terms of prices paid to producers in various countries. Output, on the other hand, is measured by gross domestic product, which is a composite measure of economic output by industry and complete category productivity. Indicators of economic growth can be measured against some commonly accepted benchmarks.
Nominal GDP, which is a measure of overall economic welfare, is derived from output, income, and population measure and then multiplied by the level of inflation-adjustment factors. Output, income, and population are all economic goods. Indices of inflation-adjustment factors reflect changes in purchasing power over time, which are necessary for a stable market. A key index that is frequently used is the Purchasing Managers Index or PMI, which is essentially an indicator of general economic sentiment, measured monthly by the survey of commerce. It is also possible to measure the pace of inflation-adjustment, known as a core index, against which other indexes are compared.
Measuring real per capita GDP, which is commonly referred to as gross national income, is another popularly used measure of economic growth. Real per capita GDP is based on current prices and increases as more money is produced. Purchasing power is measured against a particular goods basket, and is expressed as a percentage of GNP per capita. The basket of particular goods includes services, capital goods, and items produced by the private sector.
Measuring the level of real per capita GDP is the ultimate objective of economic policy makers. The degree of economic development in a country has a profound impact on its status as a leading country in the world economy. For this reason, it is important to take an appropriate amount of time and effort to develop policies that will measure the progress of the nation in terms of economic performance. As long as these policies are established, the process of what is considered to be an ongoing economic recovery.