Rates of Growth

Since economic growth is an increase in production over time, we will want to look at the progress in a particular year. Growth in a particular year is measured by the "rate of growth" of RGDP. This is the growth in a particular year as a proportion of the production at the beginning of that year.

Thus, the growth rate of real gross domestic product is expressed as RGDP/RGDP. For example, in the fourth quarter of 1994, RGDP was 6691.3 billion chained 1992 dollars, but by the fourth quarter of 1995 it had increased to 6776.5 billion. Therefore, RGDP = 6776.5-6691.3=85.2 billion 1992 dollars. In turn the rate of growth of GDP was 85.2/6691.3 = 1.27% in 1995.

Notice that growth at a constant rate over more than one year compounds from year to year. This can produce some surprises. For example, if RGDP grows at 2% in 1997 and again at 2% in 1998, then production at the beginning of 1999 is 1.02 times 1.02 = 1.0404 times as great as it was at the end of 1996. If it continues growing at a steady 2%, production would be 22% greater after 10 years, 49% greater after 20 years, twice as large after 35 years, and 2.69 times as great after 50 years. The surprising power of compound growth increases as the period gets longer, and, of course, as the rate of growth gets larger.

Once again, growth in RGDP is not the same thing as an improvement in well-being or in the standard of living. At the very least, we have to allow for growth in the population, which would mean that the production has to be divided among more people. The growth rate of the population is POP/POP. For a modern industrialized country such as the United States, population growth tends to be in the range of 1% or less. For example, in 1991 the U. S. population grew at 0.91 of one percent.

A first approximation to a measure of the standard of living would be RGDP per capita. Thus, we will be interested also in the growth rate of RGDP per capita. The growth rate of RGDP per capita is the difference between the growth rate of RGDP and the growth rate of the population. If the population is still growing at about 9/10 of one percent -- data for 1995 were not available -- then the growth of RGDP per capita would have been 1.27-0.9 = 0.37 of a percent. This is low, by historical standards, and 1995 was thought of as a year of slow growth or stagnation.

Smith also taught us that labor productivity is the most important, direct economic determinant of the standard of living. For the country as a whole, labor productivity is the output per person employed in the work force. In the fourth quarter of 1995, 98,436,000 people were working in the United States, so productivity, in that quarter, was 6776.5 billion divided by 98,436,000 = 68841.68 chained 1992 dollars. Once again, we would measure the growth of labor productivity as the difference, growth of RDGP minus growth of the employed labor force.

News discussions are often careless about the difference between the levels of production, productivity and population and the rates of growth of these measures. For example, the rate of growth of labor productivity has been lower, on the average, since 1975 than it was during 1945-75. Does that mean "productivity is lower?" No, indeed -- productivity has risen by over 20% between 1975 and 1992; but it has risen at a slower rate than it did during the earlier period.

In this, as always in economics, it is important to keep the definitions of terms in mind and use them. If you feel confused, stop and review the definitions -- and be sure you have them right! Muddled definitions are a common cause of confusion in economics.