Measures of Economic Growth (Cambridge International IGCSE Economics)

Economic Growth

Spec point — 4.6.1 · Economic Growth Defined

• 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)

Spec point — 4.6.1 · Real Gross Domestic Product (GDP) and how it can be used to measure economic growth. GDP per head (capita).

• 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

Spec point — 4.6.1 · GDP per head (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