- If you imagine a big farm with multiple farming families on it, exclusively producing crops, then GDP is the amount of crops they produce each year, and economic growth is how much GDP (their total crop production) goes up from year to year. Total crop production could go up because they're getting more productive (more crops per person), or just more numerous (more people growing crops), or some combination.
- In a real economy, there are all kinds of other things produced in addition to crops - including services, such as haircuts - but we convert them all to the same units (using their prices) to see how much total "stuff" is produced each year. Again, economic growth reflects some combination of more people and more "stuff" produced per person.
A bit more detail
- Every quarter or so, there are official estimates made of the total dollar value of all of the goods and services that are produced in a year (GDP).
- So in theory, if you buy a candy bar for $1 and get a haircut for $20, $21 gets added to GDP.
- In theory, "GDP can be measured either by the sum of what is purchased in the economy ... or by [the sum of all] income earned on what is produced." That's because everyone's purchase is someone else's income.
- There are also estimates made of the average change in prices for all the goods and services (inflation). 1
- "Economic growth" usually refers to how much GDP grows in a year, adjusted for how much prices rise in a year. In my view, the easiest way to think of this is as the change in how much "total stuff" (including services, e.g. haircuts) was produced in one year vs. the year before.
Misconceptions and imperfections of the concept
Economic growth doesn't necessarily measure people getting richer (having more stuff per person). Economic growth can be caused just by population growth. There is a separate concept, "per-capita economic growth," referring to the amount of total stuff there is per person, which can be thought of as a measure of people getting richer or poorer.
Economic growth is subject to imperfect measurement. In particular, as estimated today, it only includes the value of transactions - things that people spend money on. So:
- If someone creates free entertainment and gives it to everyone (without selling advertising or anything else), this won't show up at all in economic growth figures.
- Things that family members do for each other (if not paid for) are not going to show up in economic growth estimates.
I don't think of economic growth as a perfect measure of what it's supposed to be measuring. But I think that major changes in it from year to year are usually meaningful.