In our previous Economics 101 article, we talked about GDP. We learned that GDP measures the total value of goods and services produced in a country.
Source: ChatGPT
When GDP rises, we say that the economy is growing.
This sounds like good news. But sometimes people hear that the economy has grown and ask a very reasonable question:
“If the economy is growing, why do I feel poorer?”
There is no single answer. Economic growth is important, but it does not automatically mean that everyone’s income, purchasing power, or quality of life improves.
Let’s look at some of the main reasons.
Growth Does Not Reach Everyone Equally
Imagine that a country’s economy grows because a few large companies earn much higher profits.
This activity increases GDP. However, if workers’ salaries do not rise and small businesses do not benefit, many people may not feel the growth in their daily lives.
The economy can become larger while most of the new income goes to a relatively small group.
This is why GDP tells us how much an economy produces, but it does not tell us how that income is shared.
To understand people’s living conditions, we must also look at wages, income distribution, employment, and poverty.
Inflation Can Reduce the Benefit of Higher Income
Imagine that your salary increases from $1,000 to $1,100. This is a 10 percent increase.
At first, this may look like an improvement.
But what if the prices of food, rent, transportation, and other basic needs rise by 15 percent during the same period?
Your salary is higher, but it buys less than before. Your nominal income has increased, while your real purchasing power has fallen.
This is one of the main reasons people may feel poorer during a period of economic growth.
The economy may be producing more, but if prices rise faster than household incomes, daily life becomes more difficult.
The Population May Also Be Growing
Total GDP may rise simply because the country has more workers, consumers, and businesses.
However, total growth does not show how much economic output is available for each person.
This is why economists also examine GDP per capita, which means GDP divided by the population.
Imagine that the economy grows by 3 percent, while the population grows by 2 percent. Growth per person is much smaller than the headline GDP figure suggests.
Even GDP per capita is only an average. It still does not show whether the income is distributed equally.
Growth May Be Concentrated in Certain Sectors
Not every part of the economy grows at the same time.
Technology, finance, construction, or energy companies may expand quickly, while agriculture, retail, or small manufacturing businesses struggle.
People working in growing industries may receive better salaries and find more opportunities. Others may face job losses, weak demand, or rising costs.
Growth may also be concentrated in one city or region. A country can report strong national growth while people in other areas see very little improvement.
This means that two people living in the same economy can experience economic growth very differently.
Housing and Basic Costs Matter
People usually judge the economy through their own household budgets.
If rent, food, education, healthcare, and transportation become more expensive, a positive GDP number may feel distant.
Imagine that your income rises slightly, but your rent increases by 30 percent. You now have less money available for savings, holidays, entertainment, or emergencies.
Technically, your income has increased. In reality, you may feel less financially secure.
This is why the cost of basic needs often affects public feelings about the economy more strongly than national growth figures.
Growth Can Come With More Debt
Household spending is one part of GDP.
If people spend more by using credit cards and consumer loans, economic activity may increase in the short term. Businesses sell more products, and GDP may grow.
But households may also become more indebted.
When interest rates rise, loan and credit card payments become more expensive. Families may then reduce their other spending and feel more pressure on their budgets.
Growth supported by rising debt may therefore feel very different from growth supported by higher productivity, better jobs, and stronger real wages.
What Should We Look at Besides GDP?
GDP is useful, but it is only one part of the economic picture.
To understand whether growth is improving people’s lives, we should also ask:
Are wages rising faster than inflation?
Are good jobs being created?
Is income becoming more equally distributed?
Can people afford housing, food, healthcare, and education?
Are households able to save, or are they depending more on debt?
Economic growth becomes meaningful when it creates opportunities and improves living standards for a broad part of society.
The Simple Idea
An economy can grow while people feel poorer because growth, income, and purchasing power are not the same thing.
GDP may rise, but prices may rise faster than wages. Growth may benefit only certain companies, sectors, or regions. Housing costs and debt payments may also take a larger share of household income.
So, when we hear that the economy is growing, we should not stop at the headline number.
A better question is:
Who is benefiting from this growth, and are ordinary people able to feel it in their daily lives?
Discussion question: Has your income ever increased while you still felt that you could afford less than before?