GDP and Economic Growth

GDP and Economic Growth

Gross Domestic Product (GDP)

GDP is the total market value of all final goods and services produced in a country during a specific period (usually one year).

GDP Components

\[GDP = C + I + G + (X - M)\]

Where: - C = Consumption (Household spending) - I = Investment (Business investment) - G = Government Spending - X = Exports - M = Imports - (X - M) = Net Exports

Types of GDP

1. Nominal GDP

GDP measured at current prices.

2. Real GDP

GDP measured at constant prices to eliminate the effect of inflation.

\[\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{GDP Deflator}} \times 100\]

Economic Growth Rate

\[\text{Growth Rate} = \frac{\text{GDP}_{\text{this year}} - \text{GDP}_{\text{last year}}}{\text{GDP}_{\text{last year}}} \times 100\%\]

GDP per Capita

\[\text{GDP per Capita} = \frac{\text{GDP}}{\text{Population}}\]

Measures the average standard of living of a country’s residents.

GDP Limitations

1. Doesn’t measure welfare - Doesn’t account for income distribution
2. Ignores informal economy - Excludes barter transactions, household economy
3. Doesn’t consider quality of life - Health, education, environment
4. Negative externalities - Pollution and environmental damage are not subtracted

Business Cycle

The economy moves in cycles: 1. Expansion - Economic growth 2. Peak - Growth peak 3. Contraction/Recession - Economic decline 4. Trough - Lowest point 5. Return to Expansion

Economic Growth Factors

1. Physical Capital - Machinery, buildings, infrastructure
2. Human Capital - Education and skills
3. Natural Resources - Available resources
4. Technology - Innovation and productivity
5. Institutional Quality - Good governance, rule of law