Measuring Economic Growth

Total real GDP can rise just because a country has more people working and buying things, not because anyone individually is better off. A country of 10 million people producing 5 percent more stuff than last year sounds great, until you learn the population also grew 5 percent. Same number of people's worth of goods to go around, per person, as before. That's why economists track real GDP per capita: it strips out pure population growth and asks whether output is rising faster than the number of people splitting it.

The mechanic is simple and approximate: percent change in real GDP per capita equals percent change in real GDP minus percent change in population. If real GDP rises 3.5 percent and population rises 1.2 percent, real GDP per capita rises about 2.3 percent, the approximate gap between the two rates. This shortcut works because growth rates are small percentages; it is not exact division, but it is accurate enough for this course and fast to compute under pressure.

This measure is the payoff of the whole unit on long-run growth. Unit 5 spends its time on how monetary and fiscal policy can push output around in the short run, often at the cost of inflation or crowding out investment, but real GDP per capita growth is what determines whether living standards rise over decades. A tiny difference in the growth rate compounds enormously: a country growing at 4 percent doubles living standards roughly every 18 years, while one growing at 2 percent takes about 36 years to double. That gap is why economists care so much about the sources of long-run growth, like productivity, capital, and technology, rather than short-run stimulus.