Economic Growth

1. What Is Economic Growth?

It refers to the growth of national income.

Why does a country’s output keep growing, and why do economic growth rates differ across countries?

2. How to Measure Economic Growth

2.1. GDP

2.1.1. What It Is

GDP: the market value of all final goods and services produced by an economy during a given period.

• Given period: a flow rather than a stock.
• Final goods and services: used for consumption; intermediate goods are used for production.
• Market value: price.

In the long run, when the GDP growth rate remains positive, this is the phenomenon of economic growth. The long-run trend level of output is called the natural level of output or potential output, and the trend growth rate is called the natural growth rate or potential growth rate.

It is published once every quarter.

2.1.2. How GDP Is Calculated

2.1.2.1. Three Dimensions

Macroeconomic participants: firms + households.

Macroeconomic markets: markets for goods and services + markets for factors of production (labor and capital used in production).

Macroeconomic participants interact in macroeconomic markets, producing three dimensions of GDP:

1. Production dimension: sum of all final goods produced by firms.
2. Expenditure dimension: sum of household expenditure on all consumption goods and investment goods.
3. Income dimension: household capital income and labor income.

From the expenditure dimension:

First, the income of firms, residents, and government can be used for consumption and investment, so GDP is divided into consumption and investment. Consumption = household consumption + government consumption, investment = firm investment, and government investment is counted as firm investment.

Second, consumption and investment include both domestic and foreign goods and services, while GDP only counts domestic production, so the foreign portion needs to be subtracted, namely exports - imports = net exports.

This gives Y=C+I+G+NX.

From the demand dimension:

C + G is consumption, also called total consumption; I is investment, also called total investment (gross fixed capital formation + changes in inventories); NX is net exports. These are called the three major demands.

Exports are called external demand, while consumption + investment are called domestic demand.

Consumption is divided into household consumption + government consumption. Household consumption is divided into urban household consumption and rural household consumption. Government consumption is not the same as government public-fiscal expenditure; the latter includes government consumption, investment, and transfer payments.

2.1.2.2. GDP Accounting Principles

1. Second-hand goods are not counted.
2. Government taxes and transfer payments are not counted.
3. Inventories are counted as investment.
4. …

2.1.3. Comparing GDP Across Time

GDP growth needs to exclude the effect of prices, which leads to the distinction between nominal GDP and real GDP. In general, the absolute value of GDP uses nominal GDP, while the growth rate uses real GDP.

Nominal GDP / real GDP = GDP deflator, which is a price index reflecting changes in the price level.

Industrial composition: primary industry + secondary industry + tertiary industry.

2.1.4. GNP

GNP: the market value of all final goods and services produced by the nationals of a country during a given period.

GNP ≈ GDP + factor income received from abroad - factor income paid abroad.

2.1.5. Is GDP Reliable?

GDP is an important measure of economic activity, but it does not fully measure wealth, welfare, income distribution, environmental costs, or non-market activity.

Can GDP Really Measure Wealth? - Bilibili

2.2. Other Indicators

Besides GDP, which can describe economic activity, there are other indicators from different angles:

2.2.1. Electricity Consumption and Freight Volume

2.2.2. New Credit

2.2.3. Aggregate Social Financing

• Do not look only at fluctuations in a single month. They should be interpreted together with historical patterns such as seasonality. For example, if October is a financing off-season every year and aggregate social financing is relatively low, a single-month decline from September cannot by itself be used to say that the economy is declining.
• How to determine inflation or deflation.

2.2.4. PMI

First, look at the absolute value. 50 is the expansion/contraction threshold, the dividing line used to distinguish economic strength and weakness. An index above 50 indicates economic expansion, while an index below 50 indicates economic contraction.

Second, look at the relative trend. This is more important than the absolute value. A rising index represents a strengthening economy, while a falling index indicates a weakening economy.

2.2.5. CPI

Consumers.

2.2.6. PPI

Producers.

2.2.7. Asset Prices

Housing prices.

3. Three Drivers of Economic Growth

Consumption, investment, and net exports.

3.1. Investment

• Fixed-asset investment (infrastructure construction)
• Corporate investment
• Real-estate development

3.2. Consumption

• Total retail sales of consumer goods

3.3. Imports and Exports

• Net exports (exports - imports)

4. Economic Policy

Economic policy acts on the three drivers of economic growth and thereby affects economic expansion and contraction.

4.1. Monetary Policy

Monetary Policy

4.2. Fiscal Policy

Fiscal Policy

5. References

• Economic Growth - Wikipedia, the Free Encyclopedia