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What Is the Relationship between GDP and Economic Growth?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 23 November 2016
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Gross Domestic Product (GDP) is a type of economic tool that is utilized by governments and economists as a means of measuring or attributing a value to the final goods and related services within a defined economy in a stated period. Usually, the measurement of GDP is used to calculate the living standards in a country due to its importance in the calculation of how well the economy is performing. As such, the relationship between GDP and economic growth is the fact that GDP serves as a means for analyzing how an economy is behaving. This link between GDP and economic growth is drawn from the fact that the GDP seeks to measure the total consumption of goods and services within the economy, a factor that helps shed light on the state of the economy under consideration.

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When measuring the GDP, the only considerations are the final goods, meaning that raw materials that have been used in the production of the final goods will not be included in this calculation. For instance, when calculating the consumption of toys, which is another way of referring to the number of toys that have been purchased in the period under consideration, the calculation will not include the rubber and other raw materials used in making the toys. Otherwise, it would lead to misleading information based on the fact that the raw material would have been counted twice — once when it was sold to the toy company as raw material and again when it was sold to the consumers as a finished product. As such, the measurement of the GDP would only be based on the finished toy, and the number of such consumables can be the basis for the measurement of how well the economy performed during the period under consideration, which also establishes a link between GDP and economic growth.

During the calculation of the GDP as part of the process of establishing the link between GDP and economic growth, the analysis is divided into time periods, which may be based on quarterly assessments or four-year assessments. Whatever the case, when the consumption within that period as high, it shows that the economy is performing according to expectations. When the consumption is low, this may be the basis of concern due to the negative macroeconomists effects. Even though consumption is necessary to maintain the economic balance, an excessive rate of consumption can have the opposite effect as it may result in inflation.

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candyquilt
Post 3

It's not easy to maintain the right GDP level to achieve economic growth. Low GDP growth means depression, high growth means inflation. Economists say that the most stable economic growth is achieved at GDP growth of 3%. But it's so hard for economists and policy makers to adjust conditions to maintain that level.

SarahGen
Post 2

@feruze-- The relationship is a little tricky. For the most part, when unemployment increases, GDP and economic growth will increase.

But like the article said, if GDP, that is consumption, goes up too much, it can have negative effects on economic growth eventually leading to an increase in unemployment. The reason is because when companies cannot match demand, prices of goods will increase. This will result in people purchasing less, meaning that GDP will fall. As GDP falls and companies do not grow, they may have to sack employees.

I hope this made sense.

bear78
Post 1

Can someone explain to me the relationship between GDP, economic growth and unemployment?

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