We often hear politicians and commentators proudly announce that “the economy has grown.”
But what does that actually mean?
The key point is this:
If the economy grows by 2% in money terms, but inflation is also 2%, then in real terms the country has effectively stood still.
Economists distinguish between:
- Nominal Growth – the increase in money values
- Real Growth – growth after inflation has been removed
In simple terms:
Real Growth = Nominal Growth – Inflation
So, if prices rise at the same rate as economic growth, there may be little or no genuine increase in national prosperity.
A Simple Example
Suppose:
- The economy was worth £1 trillion last year
- It is worth £1.02 trillion this year
- That appears to be 2% growth
However, if inflation was also 2%, then the extra £20 billion may simply reflect higher prices rather than increased production or wealth.
In reality:
- Goods and services are costing more
- Purchasing power has not improved
- Living standards may be unchanged
In effect, the economy has flatlined.
Why This Matters
This distinction is important because large money figures can create the impression of success even where ordinary people feel no better off.
The same principle applies to wages and pensions:
- If wages rise by 4%
- But inflation rises by 6%
- Real spending power has actually fallen by 2%
People may earn more pounds, but those pounds buy less.
The Bigger Picture
True economic improvement usually depends upon:
- Increased productivity
- More goods and services being produced
- Higher real wages
- Improved purchasing power
Without those factors, rising figures can sometimes reflect little more than inflation itself.
That is why real economists focus heavily on “real” growth rather than simply headline money values. Politicians usually ignore these FACTS. (especially Rachel from accounts).
At Lifetime Trustees, we believe that understanding financial and economic realities is an important part of sensible long-term planning for families and future generations.
Enjoy your day.