Economic growth means real GDP going up. That sounds simple until you have to say which kind of growth, draw it two different ways, calculate it from a data table, and then argue about whether it is worth having. This page does all four.
📚 What you need to know
Economic growth is an increase in real GDP — output measured at constant prices.
Short-run growth comes from using spare capacity better: AD shifts right, or you move from inside the PPC towards it.
Long-run growth comes from more capacity: LRAS shifts right, or the whole PPC shifts outwards.
To calculate a growth rate you need nominal GDP, the GDP deflator, then the percentage change in real GDP.
Growth raises incomes, employment and tax revenue — but brings pollution, resource depletion and often greater inequality.
Growth does not always cause inflation. If it comes from the supply side, prices can fall.
Short run and long run growth
The difference is simple. Short-run growth is using what you already have more fully — hiring the unemployed, restarting idle machines. Long-run growth is having more to use in the first place.
On the left the economy still has a negative output gap, so extra demand raises output with only a small rise in prices. Once YFE is reached, more AD would only push prices up.
The same idea on a PPC
The PPC and AD/AS versions are the same story in two languages. Moving from X to Y matches AD shifting right; PPC₁ to PPC₂ matches LRAS shifting right.
Calculating a growth rate
Growth is always measured in real terms, because a rise in nominal GDP might be nothing more than a rise in prices. The GDP deflator strips those price rises out.
The two formulas you need
real GDP = nominal GDP ÷ deflator × 100
growth rate = (change in real GDP ÷ original real GDP) × 100
WORKED EXAMPLE
Finding the real growth rate from data
An economy reports, in billions: consumption 800, investment 210, government spending 300, exports 260, imports 190 in year 1. In year 2 the figures are 850, 240, 320, 300, 210. The GDP deflator is 104.0 in year 1 and 108.0 in year 2. Calculate the rate of economic growth to two decimal places.
Step 1: nominal GDP in year 1800 + 210 + 300 + (260 − 190) = $1380 bnStep 2: nominal GDP in year 2850 + 240 + 320 + (300 − 210) = $1500 bnStep 3: convert both to real GDPYear 1: 1380 ÷ 104.0 × 100 = $1326.92 bnYear 2: 1500 ÷ 108.0 × 100 = $1388.89 bnStep 4: percentage change in real GDP(1388.89 − 1326.92) ÷ 1326.92 × 100= 61.97 ÷ 1326.92 × 100 = 4.67%Real economic growth = 4.67%Nominal GDP rose by 8.70%, so nearly half of that “growth” was just higher prices.
Show every line of working. Most of these questions carry four marks, and one mark is usually available for correct method even if the arithmetic slips.
Is growth always a good thing?
Area
Benefits of growth
Costs of growth
Living standards
Higher incomes and more employment; fewer of the social harms that come with joblessness
Longer hours and less leisure; rising demand can push up prices and hit people on fixed incomes
The environment
Money and technology to clean up; richer countries can afford greener production
More pollution and negative externalities; non-renewable resources used up faster
Income distribution
Less absolute poverty; more tax revenue to fund welfare
Profits often rise faster than wages, so relative inequality can widen
Government finances
More tax revenue without raising tax rates
Spending pressure grows too, and booms are often followed by expensive busts
The examiner’s favourite nuance. Growth does not automatically mean inflation. If it is driven by higher aggregate supply — better technology, more skilled workers — output rises while the average price level actually falls.
💡 Exam tip
Always say real GDP. Growth measured in nominal GDP is not growth.
Decide first whether the question is about short-run or long-run growth, then pick the diagram.
In data response, watch for distractors in the table such as income tax or net income.
Round only at the end, and to the number of decimal places the question asks for.
For evaluation, use the phrase societal well-being and talk about who gains and who loses.
Link growth to the other objectives — it usually cuts unemployment but can raise inflation.
⚠️ Common mix-up
Using nominal GDP for the growth rate. Deflate first, then take the percentage change.
Dividing by the wrong year. The percentage change is always divided by the original value.
Shifting AD to show long-run growth. Long-run growth needs LRAS or the PPC to move.
Saying growth always causes inflation. Supply-side growth can lower prices.
Confusing growth with development. Growth is more output; development is broader well-being.
Forgetting that a point inside the PPC exists. Recessions put economies there, and recovery is short-run growth.
Up next: Low Unemployment as an Objective — how unemployment is measured, the five types, and why the measured rate can hide the real problem.
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