Measures of Economic Growth

Exam code: 2281

Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

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

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

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

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 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

Economic Growth