How big is an economy? Economists add up everything it produces.
Three terms to know
GDP
The value of all final goods and services produced within a country in a year.
GNI
GDP plus the income residents earn abroad, minus income paid to foreigners.
Informal economy
Activity that is not recorded, regulated or taxed: cash jobs, street trading.
The points to remember
- Final goods only: count the bread, not the flour as well, or output is counted twice.
- Nominal GDP uses today's prices; real GDP removes inflation (next micro-topic).
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Every euro spent on output becomes someone's income, so three methods give the same total.
Three ways to measure GDP
Output method
Add up the value of everything firms produce.
Income method
Add up wages, rent, interest and profit.
Expenditure method
Add up all spending on final output: C + I + G + (X − M).
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Paper 2 gives a table of national accounts and asks for one missing number.
Our example (made-up numbers)
| National accounts | € billion |
|---|---|
| Consumption (C) | 600 |
| Investment (I) | 150 |
| Government spending (G) | 200 |
| Exports (X) | 250 |
| Imports (M) | 200 |
| GDP | 1,000 |
| Income received from abroad | 40 |
| Income paid abroad | 60 |
| GNI | 980 |
The points to remember
- GDP = C + I + G + (X − M): 600 + 150 + 200 + (250 − 200) = 1,000.
- GNI = GDP + net income from abroad: 1,000 + (40 − 60) = 980.
- Imports are subtracted: spending on foreign output is not produced here.
Remember it as: Spent here, made here: C + I + G + X − M.
Paper 2 asked this in May 2024, for 2 marks, with the imports missing from the table.
Our example (made-up numbers)
| National accounts | € billion |
|---|---|
| Consumption (C) | 600 |
| Investment (I) | 150 |
| Government spending (G) | 200 |
| Exports (X) | 250 |
| Imports (M) | ? |
| GDP | 1,000 |
Using the table, calculate the value of imports (€ billion).
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
How the 2 marks are given
| You write | Marks |
|---|---|
| Valid working: the equation set up, C + I + G + X − M = GDP | 1 |
| The answer: 200 | 1 |
| The answer alone, no working | 1 |