Real Economic Growth Rate

Published Oct 25, 2023

Definition of Real Economic Growth Rate

The real economic growth rate is a measure that represents the percentage change in a country’s gross domestic product (GDP) over a specific period. It is used to assess the overall health and expansion of an economy. Unlike the nominal GDP, which is calculated using current prices, the real GDP accounts for changes in inflation, providing a more accurate measure of economic growth.

Example

Let’s consider a hypothetical country called “Economia.” In the year 2019, Economia’s GDP was $1 trillion. In 2020, it experienced a recession due to a global economic downturn, causing its GDP to decrease to $950 billion. However, in 2021, Economia experienced a period of growth, and its GDP increased to $1.05 trillion.

To calculate the real economic growth rate between 2020 and 2021, we need to adjust for inflation. Let’s assume that during this period, Economia’s inflation rate was 2%. To calculate the real GDP in 2021, we divide the nominal GDP by (1 + inflation rate), which in this case gives us $1.05 trillion / (1 + 0.02) = $1.029 trillion.

Now we can calculate the real economic growth rate by taking the difference between the real GDP in 2021 and the real GDP in 2020, divided by the real GDP in 2020, and multiplied by 100%. In this case, the calculation would be (($1.029 trillion – $950 billion) / $950 billion) * 100% = 8.32%.

Therefore, Economia’s real economic growth rate between 2020 and 2021 is 8.32%.

Why Real Economic Growth Rate Matters

The real economic growth rate is a crucial metric for assessing the performance of an economy. A higher growth rate indicates a healthier economy, as it reflects an increase in the production of goods and services. This growth can lead to job creation, higher incomes, and an improved standard of living for individuals within the country.

Governments, policymakers, and investors closely monitor the real economic growth rate as it impacts various aspects of the economy. Higher growth rates often indicate favorable investment opportunities, while lower growth rates may prompt the need for policy adjustments to stimulate economic activity.

Understanding the real economic growth rate helps identify trends, predict future economic outcomes, and measure the success of economic policies and strategies implemented by governments or organizations. It provides valuable insights into the overall health of an economy and influences decisions made by both individuals and businesses.