Chapter 22: Economic Growth
The Basics of Economic Growth
Economic growth is a sustained expansion of production possibilities measured as the increase in
real GDP over a given period.
Economic growth rate is the annual percentage change of real GDP.
Real GDP growth rate = (Real GDP in current year – Real GDP in previous year) / Real GDP in
previous year x 100
The growth rate of real GDP tells us how rapidly the total economy is expanding. This measure is
useful for telling us about potential changes in the balance of economic power among nations.
However, it does not tell us about changes in the standard of living.
Standard of living depends on real GDP per person (per capita real GDP), which is real GDP divided
by the population. So the contribution of real GDP growth to the change in the standard of living
depends on the growth rate of real GDP per person.
Real GDP per person grows only if real GDP grows faster than the population grows. If the growth
rate of the population exceeds the growth of real GDP, then real GDP per person falls.
Sustained growth of real GDP per person can transform a poor society into a wealthy one. The reason
is that economic growth is like compound interest.
Rule of 70 states that the number of years it takes for the level of any variable to double is
approximately 70 divided by the annual percentage growth rate of the variable.
Economic Growth Trends
The average growth rate of Canadian GDP from 1926 to 2007 was 2.1 percent a year. The trend is
marked by two extraordinary events: the Great Depression of 1930s and World War II of the 1940s.
The 1950s had slow growth, and then it increased in the 1960s. Why does our economy grow and
why does the long-term vary?
Even modest differences in economic growth rates sustained over a number of years bring out
enormous difference in the standard o