That's why it may rise simply by the rise in the price level without any change in the volume of goods and services produced. In order to solve this problem we consider the concept of real GDP. To calculate real GDP we have to assume a base year. A base year is normally selected from the previous years in which the functioning of the economy was normal.
Once we select the base year then we measure the value of goods and services produced in the current year at the price of the base year. This is known as real GDP. A rise in real GDP definitely implies economic growth.
Another measurement of the economic growth is the Per Capita Income i.e. the average of the national income of the country. If the per capita income of a country grows over time it would also imply economic growth. (Donbusch and Fischer, 1989)
Here we are to discuss the importance of economic growth for a country. Economic growth is an important factor in promoting the economic development. Hence economic growth is a mean and economic development is an end by itself.
From the definition of economic growth it is vivid that economic growth implies increase in production of goods and services within the economy. The creation of goods and services means the creation of wealth within the economy. ...
The creation of goods and services means the creation of wealth within the economy. It is quite likely that economic growth would generate higher income level of the country and thereby it would be effective for removal of poverty. It has been found that economic growth can play the role of the major driver in reduction of poverty. In the East Asian countries the decline in poverty is strongly correlated to the rate of growth of the countries. (AusAiD, n.d.) .
Economic growth and welfare
Theoretically economic growth can increase the welfare level of a country. This can be shown with the help of the following diagram. In the following diagram the horizontal and vertical axes measure the quantity of X and Y respectively, B1B1 is the initial production possibilities frontier that represents the locus of different combinations of two commodities that can be produced by the optimum utilization of the factors given the condition that the factor endowment is limited and full employment exists. The country would seek to maximize welfare. That is possible while given the feasible condition the maximum level of satisfaction is attained while the maximum possible community indifference curve can be reached. (The community indifference curve refers to the locus of various combinations of two commodities that yield equal level of social welfare for the country. Hence, in the following figure E is the initial equilibrium condition determined by the tangency of the community indifference curve I0 I0)
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Before discussing the importance of economic growth first we need to make conceptual clarification of economic growth. In general economic growth refers to the increase in the production of goods and services over a period of time.
Economic growth is measured in terms of Gross Domestic Product (GDP) of a country…
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