Economic growth is a long-term expansion of the productive potential of the economy
Trend growth refers to the smooth path of long run national output
Measuring the trend rate of growth requires a long-run series of data perhaps of 20-30 years or more in order to calculate average growth rates from peak to peak across different economic cycles
The table below tracks the growth rates achieved in the world economy for three recent years and also for developing countries excluding China and India.
Real GDP growth (annual % change)
Developing countries excluding China and India
What determines the rate of economic growth?
Every country is different, each factor will vary in importance for a country at a given point in time
Remember too that in our inter-connected globalising world, growth does not happen in isolation. Events in one country and region can have a significant effect on growth prospects in another
Here are some of the main determinants of economic growth – they apply for both developing and developed countries although the relative weighting that we might attach to each will depend on the individual circumstances facing each country or region.
Growth in physical capital stock - leading to a rise in capital per employee (capital deepening)
Growth in the size of the active labour force available for production
Growth in the quality of labour (human capital)
Technological progress and innovation driving productivity improvements i.e. higher GDP per hour worked
Institutions - including maintaining the rule of law, stable demcracy, macro-economic stability
Rising demand for goods and services - either led by domestic demand or from external trade
Key exam point:
Economic growth is not the same as economic development!
Growth can support development but the two are distinct – an important point to make in any A2 macro essay or data response question
Threats / Challenges to Economic Growth
Changes in the real exchange rate affecting competitiveness
Cyclical fluctuations in national output and external trade
Financial instability e.g. unsustainable credit boom and fall in savings
Volatility in world prices for essential imports and key exports
Political instability / military conflicts
Natural disasters and other external supply shocks
Unexpected breakthroughs in the state of technology
Geoff Riley FRSA has been teaching Economics for nearly thirty years. He has twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.