Final answer:
Economic growth is measured by the percentage change in real GDP, which is an important indicator of a country's standard of living. Small differences in growth rates can have large impacts over time due to the effects of compound growth.
Step-by-step explanation:
How is Economic Growth Measured?
Economic growth is measured by the percentage change in real gross domestic product (GDP), which is the inflation-adjusted value of all goods and services produced within a country in a given year. A real GDP growth rate of more than 3% is generally viewed as a sign of a healthy economy.
Importance of Economic Growth
Economic growth is critically important because it correlates with the standard of living of a country’s inhabitants. Growth can mean more investment in healthcare, education, and infrastructure, leading to overall improvements in quality of life and economic well-being.
Significance of Growth Rate Differences Over Decades
Even relatively small differences in economic growth rates can have a significant impact over time due to compound growth. For instance, an economy growing at 2.5% compared to 3% will experience a substantial divergence over several decades, with the faster-growing economy drastically outpacing the slower one in terms of GDP per capita.
Compound growth has a similar effect on economies as compound interest does on savings. This growth compounds over the years, significantly multiplying the original amount of economic activity and potential for higher standard of living.