Economic growth of a country is generally measured in terms of percentage change in Gross domestic product. In this context, one thing should be remembered that while measuring economic growth, one needs to take into account change in real GDP. The reason behind considering real GDP instead of nominal GDP is to net out the effect of price rise, i.e. inflation. Nominal GDP is simply a money value of the total amount of goods and services produced in a country in a particular period of time. Hence, it is quite evident that nominal GDP will increase through rise in price level even in the absence of increase in the level of production of goods and services. Therefore, it would be quite unjustified to consider increase in nominal GDP as an indicator of increase in production level of a country. Consequently to obtain reliable measure of economic growth change in real GDP is taken into consideration. Real GDP is calculated by assuming a base year. Selection of a base year for calculation of real GDP is required to be done with adequate care. Conventionally, for calculating real GDP of a country for a particular year, that year is chosen as the base year from the previous years in which economy of that country functioned in a normal way. Once selection of the base year is done, real GDP of a particular year, say current year, is calculated by valuing total amount of goods and services produced in the current year at the base year price level. (Branson, 1989; Chacholiades, 1990; Donbusch, and Fischer, 1989)
Apart from measuring economic growth by estimating change in real GDP, there exists another way to measure economic growth of a country. One can take into account change in the level of per capital income of a country to measure rate of economic growth of that country. Per capita income of a country for particular period is measured by diving GDP by total number of people living in that country in that period of time. If per capita income of a country is found to increase over time, then it can be said that the country has set itself on the path of economic growth. (Donbusch and Fischer, 1989; Clark, 1957,)
Economic growth is regarded as an essential factor for ensuring a country's wellbeing. It is therefore, would be to quite interesting find out why economic growth of a country is regarded as such an important factor for welfare of people living in a country.
Importance of economic growth
Before discussing importance of economic growth, it is necessary to distinguish between economic growth and economic development. Economic growth and economic development, both of these terms are used in the context of indicating wellbeing of a nation. Economic growth, however, is a much narrower concept, compared to economic development. As mentioned earlier, economic growth of a country is measured by taking into account changes in one specific measure only, like real GDP, or per capita income of that country over a particular period of time. Economic development, on the other hand, refers to much more than mere increase in real GDP or per capita income only. Conventionally, the term economic development refers to improvement in a wide range of indicators including GDP growth rate, rate of poverty, literacy rates, rate if life expectancy at birth, infant mortality