Economic growth refers to the rate at which economic activity changes over a period of time - usually a year.

Let us take a simple example. There are ten people that make up a country. They each buy and sell different things to enable them all to survive and prosper. The total amount that they each spend in a year represents the value of the products and services they have bought. When added together, this gives the level of economic activity for that year. In year 1, it comes to £1,000.

In the next year, the value of the goods and services they buy and sell comes to £1025. The rate of economic growth would be the difference between growth in year 1 and year 2 expressed as a percentage. The difference is £25. As a percentage, this is:

25/1000 x 100 = 2.5%

This means that this simple economy is 2.5% bigger than the year before.

If in year three, the total value of goods and services bought and sold came to 1,075 then economic growth between year 2 and 3 would be 50 (the difference between year 2 and 3) divided by 1025 (the level in year 2) multiplied by 100 = 4.87%

We could also show that the economic growth between year 1 and year 3 would have been 75/1000 x 100 = 7.5%

"The green shoots of recovery" - when economic growth has been slow, the prospects for an improvement in the amount of buying and selling that goes on in the economy is always welcomed by many! Copyright: Jason Antony, from stock.xchng.

In the UK, the current level of economic growth is around 2.7%. In a country like the UK, this is regarded as being a satisfactory level of growth. If growth was any larger than this it might cause some difficulties with inflation. A level of growth at 1% would be considered quite slow.

Negative Economic Growth

Economic growth could be negative. In our simple economy, if, in year 4, the amount of goods bought and sold came to £1060 then economic growth between year 3 and 4 would be:

-15/1075 x 100 = -2.7%

We have put a minus sign in front of the 15 to show that the difference between the level of activity in year 4 and year 3 was negative. If economic growth were negative, this would be regarded as being a serious problem and would have lots of different effects on businesses.

The value of the output of goods and services produced in a year in a country is called the gross domestic product (GDP)

The sums of money involved in GDP figures are almost beyond comprehension. In 2005, UK GDP was £1,209,334,000,000 - that's 1.2 trillion. Source of data: ONS.

Questions

Type your answers into the box provided.

Explain the difference between the public sector and the private sector. You can use Biz/ed's glossary to help you.

What is meant by the term GDP?

What effects would a slowdown in economic activity have on the following businesses:

• A supermarket like Tesco
• A business selling furniture
• A restaurant business?