Economic Growth

What is Economic Growth? Economic growth is the process by which a nation’s wealth increases over time. Growth is typically represented by the improvement in the market value of goods and services produced by an economy, which is called the gross domestic product (GDP). Economic growth can be measured in ‘nominal’ or ‘real’ terms. Nominal economic growth refers to the total value of the market products and services that an economy produces, and which remains unaffected by the price changes caused by inflation, deflation, or other factors. In other terms, nominal GDP considers the current market price. Real economic growth, the preferred measure most economists use, measures the value of economic output adjusted for price changes – that is, the value of nominal GDP adjusted for inflation. This is because it better reflects how much a country is producing at a given time, compared with other points in time.

How is GDP Measured?

Fiji’s GDP data is produced by the Fiji Bureau of Statistics, which holds the mandate to collect data from households, companies, and government organizations. GDP is then calculated in three different ways, production, income, and expenditure.

The production approach is the sum of the value of all the goods and services produced, less the cost of goods and services used in the production process. In the calculation process, only the value-added, that is the amount by which the value of the product is increased at each stage of production, is included in the GDP calculation.

The income method is the total income generated by the goods and services produced. This includes profits, wages and other employee payments, income from rent and interest earned.

The expenditure approach identifies the total value of expenditure by consumers, businesses and government on final goods and services. Additionally, expenditure on net exports is considered, that is the expenditure on exports less the expenditure on imports.

Contributions to Economic Growth

The rate of economic growth is driven by GDP’s four components.

Personal consumption, inclusive of retail sales, refers to spending by households on things like rent, utilities, and groceries. Increase in household spending often follows increases in household income.

Business investment, including construction and inventory levels, refers to spending by business that increases the economy’s capacity to produce goods and services. The level of investment in the economy is determined by factors such as interest rates, government policy, and changes in technology.

Government spending, whose largest categories are social welfare benefits, defense spending and medical benefits, can either be structural, that is, spending regardless of the state of the economy, and cyclical, which is spending for social and economic security.

Net trade, where spending on imports and exports.

The size of the contribution to growth is determined by both the size of the component and its growth rate. For example, consumption accounts for more than half of GDP and tends to grow at a steady rate, so it almost always makes a large contribution to GDP growth.

Limitations of GDP Statistics

While gross domestic product is the main measure of economic growth, it does not capture everything that adds value to the economy. Higher output does not necessarily make for better quality of life and the financial worth of goods and services is not enough to truly assess a nation’s success.

Similarly, GDP does not identify how evenly national income is split across the population. Income may have increased across the population or may have been concentrated to certain groups. GDP does not capture the broader aspects of economic welfare for the nation’s population.

Finally, income generated in the country by an overseas company that is transferred back to foreign investors is not captured in GDP and overstates a country’s economic output. Initial spending to repair and replace infrastructure after natural disasters raises measures of economic growth but cannot be indicated to add value to the economy overall.

Business Cycle Trends and Growth

Economic

Economic contractions, troughs, expansions, and peaks are unpredictable phases of economic activity referred to as economic business cycles.

In the upswing stage of the business cycle, there is usually strong growth in GDP and employment. As a result, the unemployment rate declines, and inflation starts to increase.

The opposite is true for the downward stage of the cycle.