Whatever you do for a living, economic growth matters to you. Economic growth, and the macro-economic trends you can see by analyzing shifts in the size and shape of a national economy, impact individuals, businesses and organizations.
This guide takes a look at why economic growth matters, how it’s measured, and what the current picture in the US looks like. We’ll also introduce a smart way to cut your cross-border business costs with Wise for business – so you can protect your profits and invest in growing your company.
Economic growth definition
Economic growth is a measure of the total production of an economy over a period of time. By measuring overall economic growth, analysts can investigate the broad economic trends impacting a country, and see if the economy is stable, growing or shrinking.
This is important on a national level as it helps to influence government and fiscal policies. On an individual level, the overall state of the economy is usually mirrored in our own personal circumstances. In a growing economy, individuals may be more likely to get salary increases, and enjoy a higher standard of living for example, whereas a shrinking economy may lead to insecurity in the labor market, increasing layoffs, and causing a loss of consumer confidence.
How is economic growth measured?
Economists typically measure economic growth on a national level using GDP – gross domestic product. GDP, in its simplest terms, is the financial value of all goods produced and services sold in a country. You’ll often find GDP expressed as a per capita number – that is, the amount of total GDP divided by the number of people in the country. This means you can more easily compare GDP despite changes in the population size.
By showing how the GDP changes from one quarter or year to the next you can see how the overall economic output of the country is changing. You’ll usually see economic growth expressed as a percentage change, representing the amount the economy has grown or shrunk over the time period.
US economic growth by year
In the US, economic trends are monitored by the Bureau for Economic Analysis (BEA). GDP and economic growth information is published quarterly, with estimates being revised and refined as additional data flows in. You can also find additional year on year data for the past 20 years online, to paint a long term picture. It’s worth noting that growth rates like these may vary slightly because of different calculation methods.
Here’s the US GDP growth for the past few years, as an example:
- GDP growth in 2016 was 1.64%
- GDP growth in 2017 was 2.37%
- GDP growth in 2018 was 2.93%
- GDP growth in 2019 was 2.16%
Why do economic growth rates matter?
The economic growth and stability of a country has a direct impact on the lives of citizens. Where an economy is growing and companies are doing well, the workforce can feel more secure in their jobs, with businesses more likely to offer pay rises and incentives to retain employees.
Individuals may have higher disposable income, and be able to save and invest more, as well as spending more and boosting economic performance further. Governments also see a rise in tax revenues, which allows for public investment and improvements in other aspects of daily life such as education and healthcare.
Steady economic growth is attractive to investors, and means that foreign direct investment (FDI) is more forthcoming. Companies could move their headquarters to be in a more stable country which offers good tax or other incentives – which then means more jobs are created, and the cycle of growth is more likely to continue.
What are the main factors of economic growth?
The main factors which influence economic growth are:
- Human capital – the number of workers available in an economy
- Technology, knowledge and education levels
- Investment and physical capital available in the country
- Raw materials and resources
- Government stability and business friendly policies
In general terms, an economy can be more productive if there are more people available for the workforce – and even more so if a high level of knowledge and education is available for workers. Economies which are stable, growing, and offer businesses attractive incentives and tax regimes can also attract high levels of investment, which further promote economic growth.
On the other hand, some key factors which can negatively impact economic growth include actual or anticipated instability, caused by government policy, wars or natural disasters for example. Poor levels of education, low public investment and protectionist or closed trading approaches can also hamper economic growth.
Economic growth vs GDP
Economic growth is often measured in terms of a change in GDP over the quarter or year. However, this is not the only measure of economic growth available.
Other important economic indicators include inflation, the consumer price index and producer price index. GDP may also be calculated in slightly different ways depending on the purpose of the data. For example, some GDP figures will take into account inflation, which gives a ‘real’ GDP per capita figure, and reflects how spending power changes.
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