Economic Growth
Gross Domestic Product (GDP)
- National income accounting measures the economic activity within a country and provides insights into how a country is performing
- One of the main methods to determine economic activity is to measure the rate of change of output in an economy
- The output of an economy is called gross domestic product (GDP)
- GDP is the value of all goods/services produced in an economy in a one-year period
- It can be measured using the following approaches
- The expenditure approach: adds up the value of all the expenditure in the economy
- This includes consumption, government spending, investment by firms and net exports (exports - imports)
- The income approach: adds up the rewards for the factors of production used
- Wages from labour, rent from land, interest from capital and profit from entrepreneurship
- Wages from labour, rent from land, interest from capital and profit from entrepreneurship
- The expenditure approach: adds up the value of all the expenditure in the economy
- Both approaches should provide the same figure as one party's expenditure is another party's income
- The value of GDP is different to the volume of GDP
- The value is the monetary worth
- The volume is the physical number
The Distinction Between Real, Nominal & Per Capita 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 general price levels (inflation)
- There has been no adjustment to the amount based on the increase in general 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
- For example, if nominal GDP is £100bn and inflation is 10% then real GDP is £90bn
- 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
Exam Tip
When an exam question uses the phrase 'at constant prices' it is referring to real GDP. For example, a question may read, 'Explain what is meant by a rise in GDP at constant prices'. This requires you to define real GDP and then explain the rise.