Economic growth: an overview

Economic growth is defined as the rate of increase of the Gross Domestic Product (GDP) of a country. Positive economic growth is an indication that the economy is producing more goods and services.

The chart shows the spectacular increase in China's GDP that exemplifies such rapid economic growth. Note that this is the GDP in constant prices, i.e. we only see the increase in production without the increase in prices. Clearly, the Chinese people are expanding their economy very fast.

Such a rapid increase in GDP is due to: 1) fast economic growth every year and 2) "compounding". Compounding means that each year the increase in GDP comes on top of the increase during the preceding year. The increases are cumulative.

For example, China's GDP in 2011 was about 45.2 trillion rembini (the Chinese currency). Then in 2012 it grew by about 8 percent to 48.8 trillion rembini. In 2013, it grew again by about 8 percent to 52.6 trillion rembini. The economic growth in both years was similar. However, while in 2012 the economic growth added 3.6 trillion rembini to the economy, in 2013 it added 3.8 trillion rembini. That is because the 8 percent growth in 2013 came on top of the growth in 2012.

The question then is not only how to achieve rapid economic growth but how to sustain it over time. In other words, we should care about long-term economic growth.

When we look across many countries and many years, economic growth is on average 2.5 to 3 percent per year. If an economy grows by 7-8 percent per year for several years, as the Chinese economy, that is extraordinary. With 8 percent economic growth, GDP doubles in size every nine years.


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