Economic Growth and Its Measurement
(Notes for Competitive Exams – JKSSB, UPSC, SSC | Home Academy)
1. Introduction to Economic Growth
Economic growth refers to the increase in the production of goods and services in an economy over a period of time. It reflects the expansion of a country’s productive capacity and indicates improvement in the economic performance of a nation.
In simple terms, economic growth means an increase in national output or national income.
Economic growth is usually measured by the increase in Gross Domestic Product (GDP) or Gross National Product (GNP) over time.
For competitive examinations, economic growth is an important concept because it reflects the development level, economic strength, and standard of living of a country.
2. Definition of Economic Growth
Economists have defined economic growth in different ways.
According to Simon Kuznets
Economic growth is:
“A long-term rise in the capacity to supply increasingly diverse economic goods to its population.”
According to Joseph Schumpeter
Economic growth is a gradual and steady increase in national income caused by expansion in production and technological progress.
3. Features of Economic Growth
Important characteristics of economic growth include:
Increase in national income
Economic growth leads to an increase in the total output of goods and services.
Rise in per capita income
Growth improves the average income of people, which increases their purchasing power.
Technological progress
Innovation and technological development increase productivity.
Structural transformation
The economy gradually shifts from agriculture to industry and services.
Increase in employment opportunities
Economic growth usually leads to more job creation.
4. Economic Growth vs Economic Development
| Basis | Economic Growth | Economic Development |
|---|---|---|
| Meaning | Increase in national income | Overall improvement in living standards |
| Nature | Quantitative change | Quantitative + Qualitative change |
| Scope | Narrow concept | Broad concept |
| Indicators | GDP, GNP | Education, health, income |
Thus, economic growth is part of economic development, but development includes social and human welfare improvements as well.
5. Measurement of Economic Growth
Economic growth is measured using different economic indicators.
1. Gross Domestic Product (GDP)
GDP refers to the total value of all final goods and services produced within the geographical boundaries of a country during a specific period (usually one year).
GDP is the most commonly used indicator of economic growth.
Higher GDP growth indicates strong economic performance.
2. Gross National Product (GNP)
GNP refers to the total value of goods and services produced by the citizens of a country, including income earned abroad.
Difference between GDP and GNP:
| Basis | GDP | GNP |
|---|---|---|
| Coverage | Within domestic territory | Includes income from abroad |
| Focus | Location of production | Ownership of production |
3. Net National Product (NNP)
NNP is calculated by subtracting depreciation from GNP.
NNP represents the actual national income available to the country.
4. Per Capita Income
Per capita income means average income per person.
It is calculated as:
Per Capita Income = National Income ÷ Total Population
It helps measure standard of living.
5. Real GDP Growth Rate
Real GDP measures economic growth after removing the effect of inflation.
It provides a more accurate picture of economic performance.
6. Methods of Measuring National Income
Economists measure national income using three main methods:
1. Production Method
Also known as Value Added Method.
National income is calculated by adding the value of goods and services produced in different sectors.
2. Income Method
National income is calculated by adding all incomes earned by factors of production.
These include:
Wages
RentInterest
Profit
3. Expenditure Method
National income is calculated by adding total expenditure on goods and services.
Formula:
National Income = Consumption + Investment + Government Expenditure + Net Exports
7. Factors Affecting Economic Growth
Economic growth depends on several important factors.
Natural Resources
Availability of land, minerals, forests, and water.
Human Capital
Education, skills, and health of the workforce.
Capital Formation
Investment in machinery, infrastructure, and industries.
Technological Progress
Innovation improves productivity.
Government Policies
Stable policies promote investment and growth.
8. Importance of Economic Growth
Economic growth is important because it:
Reduces poverty
Increases employmentImproves living standards
Strengthens government revenue
Supports infrastructure development
For countries like India, economic growth is essential to achieve sustainable development and social welfare.
9. Limitations of Economic Growth as a Measure
Economic growth alone does not fully represent development.
Some limitations include:
It ignores income inequalityIt does not consider environmental damage
It ignores quality of life indicators
It may not reflect poverty reduction
Therefore, modern economists also use Human Development Index (HDI) to measure development.
MCQ Questions for Competitive Exams
1. Economic growth refers to
A. Increase in population
B. Increase in national income
C. Increase in taxes
D. Increase in imports
Answer: B. Increase in national income
2. Economic growth is generally measured by
A. Population
B. GDP
C. Imports
D. Government expenditure
Answer: B. GDP
3. The concept of economic growth was strongly explained by
A. Adam Smith
B. David Ricardo
C. Simon Kuznets
D. Karl Marx
Answer: C. Simon Kuznets
4. GDP refers to
A. Income earned abroad
B. Total value of goods and services produced within a country
C. Government revenue
D. International trade
Answer: B. Total value of goods and services produced within a country
5. Per capita income means
A. National income
B. Income per household
C. Average income per person
D. Government income
Answer: C. Average income per person
6. National income can be measured by
A. One method
B. Two methods
C. Three methods
D. Four methods
Answer: C. Three methods
7. Which of the following is NOT a method of measuring national income?
A. Production method
B. Income method
C. Expenditure method
D. Population method
Answer: D. Population method
8. Real GDP means GDP adjusted for
A. Population
B. Inflation
C. Imports
D. Exports
Answer: B. Inflation
9. Net National Product is
A. GDP + depreciation
B. GNP – depreciation
C. GDP – taxes
D. GNP + taxes
Answer: B. GNP – depreciation
10. Economic growth mainly focuses on
A. Social welfare
B. Cultural development
C. Increase in output and income
D. Political stability
Answer: C. Increase in output and income