Question

Answer the following prompts:

1. Explain why economic growth is important.
2. Explain how economic growth is measured using real GDP and per capita GDP. Use numerical examples in your explanation.
3. Does an increase in economic growth necessarily improve the standard of living?

Answer 1

Economic Growth

A) Economic growth is important for the welfare and development of a country or an economy. To increase the level of employment, income of the people, ability of the economy to match the demand and supply etc, economic growth contribute much. This enables the consumers to consume more and enjoy better standard of living. Thus economic growth leads to attain better stage of welfare, standard of living and efficient allocation and utilization of resources.

B) Real GDP is measured excluding the effect of change in price or inflation. Nominal GDP when includes the current prices without avoiding the effect of change in price, cannot observe the actual change in growth. Also, real per capital refers to the actual change in per capita excluding the inflation effect. Thus, growth can only be analyzed through the real calculations, not the nominal ones.

Consider a nominal GDP of a country over a year 2010 given $100,000. This is analyzed in the current prices and quantity produced in the year 2010. Real GDP is measured with a base price which is already fixed to a year assuming 2005. The real GDP will be according to the price of 2005 and the quantity produced in 2010. Real GDP may only be $70,000 reducing the effect of change in price of the commodities. This helps to find out the actual growth of the economy through the increase in the level of output produced of the commodities.  

The case is same for per capita GDP. Increase in per capita GDP includes the effect of price. The real increase in the per capita that is income per population can only be analyzed by taking the real GDP and finding per capita from that. Per capita income may be increased with an inflation that is an increase in the rate of inflation may increase the per capita income from $15000 to $16000 over a year. But calculating the real GDP may reduce the effect of price and keeping the per capita back to $15,000 itself showing no change in real income.

c) An increase in economic growth is necessarily called to increase the standard of living. But that may not always works out. The ability of a country to increase the standard of living varies accordingly how it opts to develop. Many countries have shown development in economic growth with increasing standard of living, and many without increasing the standard of living. Developing nations are more apt to this example. The economic growth gained through the structural change in one sector may not always increases the level of standard of living. The standard of living can only be increased through a decentralized and a growth of economy through the development of entire sectors rather than of one or few.