The Trend Rate of Economic Growth

Readers Question: Explain the distinction between “real GDP growth and the “trend rate of growth” (6marks)

The trend rate of economic growth is the average sustainable rate of economic growth over a period of time. For example, in the UK, the trend rate has tended to be about 2.5%. However, the real GDP growth rate can diverge from this average trend. In a boom growth may be higher than the trend rate. However, growth of 4-5% is likely to cause inflation and be unsustainable. Growth below the trend rate will cause an increase in spare capacity.

The trend rate is determined by productivity growth. Typically Aggregate Supply in the UK will increase by 2.% a year. Fluctuations in demand can cause a fluctuations in the actual growth rate.

The trend rate of growth in China could be 8-9% a year