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Economic growth – sometimes simply “growth” – typically refers to GDP growth. A country’s gross domestic product or GDP is a measure of the size and health of its economy. It is the total value of goods and services produced over a specific time period. An annual GDP growth rate of 3%, then, simply means that the economy has grown by 3% over the past year. Why is economic growth so important? Andy Haldane, the Bank of England’s Chief Economist, explains:
When GDP goes up, the economy is generally thought to be doing well. Meanwhile, weak growth signals that the economy is doing poorly. If GDP falls from one quarter to the next then growth is negative. This often brings with it falling incomes, lower consumption and job cuts. The economy is in recession when it has two consecutive quarters (i.e. six months) of negative growth. Following the global financial crisis that ignited in 2007, UK GDP fell by 6%. This marked the deepest recession for 80 years. The impact on people’s lives was severe with large falls in wages, restricted access to credit and many people losing their jobs.
We set interest rates in order to keep inflation low and stable. Achieving this helps create the conditions needed for a healthy economy. Following the EU referendum, for example, we cut Bank Rate from 0.5% to 0.25% alongside other measures in order to stimulate the economy while helping us meet our target for inflation. And in fact, whenever we consider different possible policy actions (such as a change in interest rates), our remit requires us to pick whichever actions will boost economic growth the most while still meeting our primary objective for low and stable inflation. We also have responsibilities to ward off the chances of a financial crisis from happening. This also helps create the conditions for economic growth. And here, too, our remit explicitly requires us to factor in the impact on growth when deciding on policy actions that help to keep the financial system safe.
Growth in the economy matters for everyone – individuals, businesses, charities and the government. It feeds in to other spheres of life, too: experts in many fields, from healthcare to climate change, need to make assumptions about future economic growth. Every three months we forecast economic growth up to three years ahead. Our forecasts are published in our Inflation Report and feed into our decisions about interest rates. Definition: Real Economic Growth Rate is the rate at which a nation's Gross Domestic product (GDP) changes/grows from one year to another. GDP is the market value of all the goods and services produced in a country in a particular time period. Description: Real Economic Growth Rate takes into account the effects of inflation. Since inflation plays a key role in the GDP of an economy, it is very important to ascertain the effects of inflation on GDP. As a result, the Real Economic Growth Rate takes into account the buying power and is inflation-adjusted. This is the reason it is considered to be a better measure of growth rate than the nominal growth rate.
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