Measures of Economic Growth (Cambridge (CIE) IGCSE Economics)

Revision Note

Economic Growth

  • Economic growth is the annual increase in the level of national output as measured by the gross domestic product (GDP)

  • GDP is the total value for all goods/services produced in an economy in a year 

The components of GDP

  • GDP can be calculated using the value of the expenditure in an economy

    • GDP = Consumption (C) + Investment (I) + Government spending (G) + Exports (X) - Imports (M)

    • GDP = C + I + G + (X-M)

    • If any of the components of GDP increase, then economic growth is likely to occur

  • Consumption is the total spending on goods/services by consumers (households) in an economy 

  • Investment is the total spending on capital goods by firms 

  • Government spending is the total spending by the government in the economy:

    • Includes public sector salaries, payments for provision of merit and public goods etc.

    • It does not include transfer payments 

  • Net exports are the difference between the revenue gained from selling goods/services abroad and the expenditure on goods/services from abroad 

The relative importance of the components of GDP

  • Depending on the country, the value of each component and its contribution to GDP can vary significantly:

    • Government spending in Sweden is 53% of GDP and in the UK it is 25% of GDP

  • The % that each component contributes to GDP in the UK is approximately

    • Consumption: 60%

    • Investment: 14%

    • Government spending: 25%

    • Net Exports: 1%

  • A 1 % increase in consumption or government spending will have a much larger impact on economic growth than a 1% increase on net exports

Real Gross Domestic Product (GDP)

  • In economics, the use of the word nominal refers to the fact that the metric has not been adjusted for inflation

  • Nominal GDP is the actual value of all goods/services produced in an economy in a one-year period

    • There has been no adjustment to the amount based on the increase in price levels (inflation)

  • Real GDP is the value of all goods/services produced in an economy in a one-year period - and adjusted for inflation

    • For example, if nominal GDP is £100bn and inflation is 10% then real GDP is £90bn

GDP/Capita

  • GDP per capita = GDP / the population

  • It shows the mean wealth of each citizen in a country

  • This makes it easier to compare standards of living between countries 

    • For example, Switzerland has a much higher GDP/capita than Burundi 

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