Measures of Economic Growth (CIE IGCSE Economics)

• 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 & public goods etc.
  • It does not include transfer payments
     
• Net exports are the difference between the revenue gained from selling goods/services abroad & the expenditure on goods/services from abroad
   

The Relative Importance of the Components of GDP

• Depending on the country, the value of each component & its contribution to GDP can vary significantly:
  • Government spending in Sweden is 53% of GDP & 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

• 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 & 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