Measuring Economic Growth (Cambridge (CIE) IGCSE Economics): Revision Note

What is GDP?

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

• GDP is the monetary value for all goods and services produced in an economy in a one-year period

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 and 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 and services abroad (exports) and the expenditure on goods and services from abroad (imports)

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 and 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 and 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