Economic growth is the process by which a nation's economy grows over time. Understanding how an economy is doing allows nations to forecast long-term business trends and compare different government policies. The most common and practical way to measure economic growth is the use of the GDP growth rate.
What is the GDP Growth Rate
The Gross Domestic Product is the total dollar amount of all goods and services produced in a country. The GDP is the sum of everything people and companies in an economy produce. The GDP growth rate is the percentage change of GDP over a certain period, usually one year. This is a major measure of economic growth, as it reflects the total change in national output of a country's economy.
Growth Rate Measurement
To calculate a country's GDP growth rate, its GDP must first be calculated. GDP is calculated by adding all money spent in a country. This is the sum of all personal consumption, business investment on capital, government spending and net exports -- the difference between total exports and total imports. Once the GDP values of two periods are calculated, the GDP growth rate can be found. The GDP growth rate is the percentage change between the two periods. A positive amount indicates economic growth; a negative value means economic decline.
Importance of Growth Rate
The GDP growth rate indicates the direction of an economy. A positive growth rate is ideal as it means a positive economy with more jobs, income, and consumption. A negative growth rate means the economy is slowing down. Businesses are cutting investments and people are spending less. Consistent decreasing growth indicates an upcoming recession. By measuring the GDP growth rate of a county, you are able to measure the direction of the country's economy.
The U.S. government and the Federal Reserve Board have some influence on the U.S. economy's economic growth. When facing a declining GDP growth rate, the Federal Reserve may lower interest rates. This gives a positive boost to GDP as lower interest rates make it less expensive for businesses to borrow money for investments. The government can increase spending to replace lost jobs in an economic decline. It can also lower taxes to motivate more personal spending. By measuring the GDP growth rate, the government can decide whether it needs to boost the economy.
- The Money Alert: Gross Domestic Product (GDP)
- "Fundamentals of Investments for Financial Planning"; Walt J. Woerheide; 2008
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