Growth, Productivity and Inflation

Abstract

For a country to grow richer in a strictly material sense, it must first of all grow. In other words, it is the increase in the volume of goods and services (real GDP) which economic growth represents that underpins the improvement in a country’s material standard of living over time. Since living standards are more meaningful when expressed in terms of individuals, real GDP per head is often preferred. It should, however, be noted that there are quite a number of qualifications to be made when linking growth to living standards — for example, if the extra goods and services are all exported, domestic consumption will not be affected, and the fruits of growth may not be distributed at all equally such that some individuals may become worse off even when the economy is growing rapidly. Furthermore, whilst certain activities conferring ‘economic well-being’ such as gardening are excluded from official figures, other activities which reduce well-being such as damaging the environment are included (see, for example, comments on the ‘genuine progress indicator’ in The Economist, 30 September 1995, p. 63).