Chapter 22.docx

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Western University
Economics 1021A/B
Jeannie Gillmore

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
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