Economic growth

What is economic growth?
Economic growth is the most fundamental indicator of an economy's health - the rate at which national income is growing. It is measured by the annual percentage rate change in a nation's gross domestic product (GDP). GDP is the economy's total income accruing from output - the market value of all goods and services produced within an economic area during a certain period.

Does it have to be measured by GDP?
Other measures of economic growth include gross national product (GNP), which measures the total output of a country's citizens regardless of where they are living and working; and per capita GDP, usually measured in dollars, which gives a more easily comparable picture of countries' economic health. However, GDP is the preferred measure for growth, as it indicates the amount of economic activity within a nation's borders.

What keeps it going?
The British economist, John Maynard Keynes, proposed a model of economic growth that suggests growth is largely self-adjusting, moving through a cycle of peaks and troughs, or "boom and bust".

At the start of the upturn, firms produce increasing amounts of goods and services, employing more and more people at higher and higher wages. People spend increasing amounts on goods and services, feeding the boom further, until the economy reaches full capacity.

At this point, investment must increase to expand the economy's production possibilities and prevent price pressures. However, this cannot happen quickly enough to avoid inflation completely; prices nearly always start to rise and so demand for goods and services begins to drop off.

Firms begin to scale back production and lay off workers - the slowdown has begun. Economic growth may even go negative (showing that the economy is now shrinking) before prices begin to drop in response. This dip in inflation kickstarts the recovery; people are again able to afford to spend more and growth begins to pick up again.

How can governments control economic growth?
Keynes believed that the aggressive peaks and troughs of the pre-war trade cycle were damaging to an economy's long-term growth prospects and need not be so extreme. The government, he said, could intervene to level out the cycle by employing various methods of aggregate demand management - the manipulation of interest rates, taxation and public spending levels.

During a downturn, the government could raise interest rates, pump money into the economy by raising public spending, and cut back taxes to boost aggregate demand and hence economic growth. During a boom period, the reverse tactics should be employed to take out the heat.

However, this hermetic, demand-led model of the economy omits important factors such as the supply side (whether the conditions exist for firms to be able to invest and expand), and external shocks from the global economy such as trade and foreign exchange rate levels.

In the face of global economic forces such as the oil price shocks of the 1970s and the Wall Street crash of 1987, there is little national governments can do but to ride out the storm.

What is the UK's pattern of growth like?
The economy is enjoying a period of sustained growth and the annual rate of economic growth has not dipped under 0% since the recession in 1991. The economy took a blow due to uncertainty exacerbated by the September 11 terrorist attacks.

Last year, the British economy dipped to a 13-year low with growth of just 1.9%. Changes to public administration, defence, and transport were blamed for the dismal performance, which fell well short of the initial 3 to 3.5% forecasts from the chancellor, Gordon Brown.

How is growth at the moment?
The Bank of England predicts that the UK's $2 trillion economy will expand by 2.6% in 2006. The economy is expected to receive a boost from improvements in business investment and exports, compensating for softer consumer spending in what economists describe as a "rebalancing" of the economy. The Office for National Statistics reported first-quarter growth of 0.7% - the strongest rate for almost two years.