Measurement of Economic Growth

Economic growth is measured by the percentage change in Real GDP. Real GDP adjusts the Nominal GDP figure for the impact of price changes (inflation or deflation).

Farmoula 3

Real GDP = Money GDP X 100/(GDP deflator or CPI)

Example: If the Money GDP is $1155 billion and the GDP deflator is 110, what is the Real GDP?

1155*100/110 = 1050

Real GDP is $1050 billion. If Real GDP was $1000 billion the previous year, what is the rate of 

economic growth?

(1050-1000)/1000*100=5%

While the rate of economic growth goes up and down in cycles, a trend rate of economic growth can be calculated for an extended period of time. While Real GDP is the preferred measure of economic growth, it does have its limitations. 

•  Certain forms of productive activity, such as housework and home repairs, are excluded.
•  Some forms of productive activity, including farm produce consumed on the farm, are not marketed (sold) and so cannot be measured accurately. The ABS estimates their value. 
• While the quantity of goods and services is measured, the quality is not. 
• The distribution of the GDP is not shown.