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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.

Question for Measures of Economic Growth
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Which component of GDP represents the total expenditure on goods and services by households in an economy?
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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.
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FAQs on Measures of Economic Growth - Economics for GCSE/IGCSE - Year 11

1. What is economic growth and why is it important?
Ans. Economic growth refers to an increase in a country's production of goods and services over time. It is important as it leads to higher standards of living, more job opportunities, and overall prosperity for the population.
2. How is Real Gross Domestic Product (GDP) calculated?
Ans. Real GDP is calculated by adjusting the nominal GDP for inflation or deflation. This adjustment provides a more accurate reflection of an economy's actual growth by eliminating the impact of price changes.
3. What is the significance of GDP per capita in measuring economic growth?
Ans. GDP per capita is a useful measure as it indicates the average economic output per person in a country. It helps to assess the standard of living and welfare of the population, reflecting how economic growth is distributed among individuals.
4. How does economic growth impact the overall development of a country?
Ans. Economic growth is crucial for a country's development as it provides the resources needed for infrastructure improvements, healthcare, education, and poverty reduction. It also contributes to technological advancements and innovation.
5. What are some factors that can hinder economic growth?
Ans. Factors that can hinder economic growth include political instability, corruption, lack of infrastructure, high levels of debt, inadequate education and training, and insufficient investment in research and development. Identifying and addressing these barriers is essential for sustained economic growth.
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