Measures of Economic Growth | Economics for GCSE/IGCSE - Year 11 PDF Download

Economic Growth

• Economic growth refers to the yearly increase in the national output, typically measured by the Gross Domestic Product (GDP). 
• GDP represents the total value of all goods and services produced within an economy over a year. 

The Components of GDP

• GDP can be determined by summing up the expenditures in an economy, where GDP = Consumption (C) + Investment (I) + Government spending (G) + Exports (X) - Imports (M).
  • GDP = C + I + G + (X-M) 
• If any of these components of GDP witness an increase, it usually indicates economic growth.
• Consumption: This refers to the total expenditure on goods and services by households in an economy.
• Investment: Investment represents the total spending on capital goods by businesses.
• Government Spending: This encompasses the total expenditure made by the government, including salaries, public goods, and services.
• Net Exports: Net exports denote the variance between revenue from exporting goods and services and expenditure on importing goods and services.

The Relative Importance of the Components of GDP

• The Gross Domestic Product (GDP) includes various elements such as public sector salaries, payments for the provision of merit and public goods, but it does not encompass transfer payments.
• Net exports signify the variance between the revenue acquired from selling goods/services abroad and the expenditure on goods/services from abroad.
• Depending on the nation, the significance and contribution of each GDP component can differ significantly. For example, government spending accounts for 53% of GDP in Sweden and 25% in the UK.
• In the UK, the percentage contribution to GDP is approximately: Consumption 60%, Investment 14%, Government spending 25%, and Net Exports 1%. Notably, a 1% increase in consumption or government spending has a more substantial impact on economic growth compared to a 1% increase in net exports.

Real Gross Domestic Product (GDP)

• In the field of economics, when we talk about "nominal," we mean that a specific measurement has not been adjusted to account for inflation.
• Nominal GDP represents the total value of all goods and services produced within an economy during a single year. This value has not been altered to accommodate changes in price levels due to inflation.
• Conversely, real GDP stands for the total value of goods and services produced within an economy during a specific period, adjusted to consider inflation. For instance, if the nominal GDP equals £100 billion and the inflation rate is 10%, the real GDP would amount to £90 billion.

GDP/Capita

• GDP per capita is calculated by dividing the GDP (Gross Domestic Product) of a country by its population.
• It represents the average wealth of each individual within a nation.
• This metric facilitates comparisons of standards of living between countries.
  • For instance, Switzerland boasts a significantly higher GDP per capita than Burundi, indicating a disparity in average wealth between the two nations.