Economic Growth

Statement

Economic growth is the increase in an economy’s level of output, or in its capacity to produce, over time. Four types are distinguished:

• Actual growth — the increase in an economy’s level of output over time, measured by the rate of growth of real GDP.
• Potential growth — the increase in an economy’s productive capacity over time.
• Sustainable growth — growth that can be maintained without creating significant environmental problems over an extended period of time.
• Inclusive growth — economic growth that is distributed fairly across society and creates opportunities for all.

Notes

Actual and potential growth are the core pair: actual growth is what is produced, potential growth is what could be produced. They are independent — potential growth can occur with no actual growth, and an economy can have actual growth (using up spare capacity) with no potential growth. Sustainable and inclusive growth are qualifications on the kind of growth a government pursues, not separate mechanisms, and connect to the limits of GDP as a welfare measure (sustainability is captured by Green GDP, traditional GDP net of natural-capital consumption).

Actual growth is computed from real GDP as $\text{annual actual growth} = \dfrac{GDP_2 - GDP_1}{GDP_1} \times 100\%$, where $GDP_1$ is the base-year value. How the two core types are shown on the PPC and on an aggregate demand–aggregate supply diagram is set out in actual versus potential growth; the welfare consequences and the trade-offs against sustainability, inclusiveness and price stability are catalogued in the consequences of economic growth.