Economics AS · The Macroeconomy. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
Economic growth is an increase in an economy's real output over time. It is measured by the percentage change in real GDP in a year.
Nominal GDP is measured in the prices of the current year, so it rises when prices rise even if output does not. Real GDP has the effect of price changes removed, so it shows the change in the volume of output.
Actual growth is a rise in real GDP, often caused by higher AD using up spare capacity. Potential growth is a rise in productive capacity, caused by more or better factors of production. Growth raises living standards, employment and tax revenue, but it can bring inflation, pollution, loss of resources and greater inequality.
Students treat a rise in nominal GDP as growth. If prices rose by the same percentage, real output has not changed. Always remove inflation first.
Answer: Real GDP grew by 2%.
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