Lesson preview · Measuring the economy
GDP and growth
~8 min · Free to read
In 1960, South Korea and Ghana each produced goods and services worth roughly 1,000 dollars a year per person, with Ghana slightly ahead. By 2024, South Korea’s output was worth about 37,000 dollars per person and Ghana’s about 2,200, a gap of about 17 times. (These World Bank figures are in US dollars at 2015 prices, so price rises are taken out.) To see how the gap opened, start with how economists measure what a country makes.
Key Term
Gross domestic product (GDP)
GDP is the value of all the final goods and services produced inside a country in a year.
- Final means not used up in making something else: the loaf of bread, not the flour the baker bought for it. The flour’s value is already in the loaf’s price, so counting it too would count it twice. A new oven the baker buys does count: it isn’t used up, and it keeps baking for years.
- Goods and services: a haircut counts, just like a phone.
- Produced means newly made, sold or not. A car built this year counts this year, even if it’s sold next year. Selling your old bike to a friend adds nothing.
- Inside a country means the place decides, not the owner. If a German firm builds cars in Mexico, they count in Mexico’s GDP.
GDP is a flow: an amount over a period, like water running from a tap each minute. A stock is an amount at one moment, like the water in the bath. A country’s wealth (its houses, roads and factories) is a stock.
One way to measure GDP is to add up spending of four kinds. Consumption is what households buy. Investment is new machines, buildings and houses, plus goods made but not yet sold. Government spending is what the government buys. Exports are what buyers abroad buy from the country. Some of this spending goes on imports, things made abroad, so you take imports away to count only what the country made. Exports minus imports is called net exports.
Every country’s GDP is made of the same four parts: consumption, investment, government spending and net exports. Only the mix changes from country to country.
Economic growth means the economy producing more goods and services, so its GDP gets bigger. Say a country’s GDP rises from 400 billion dollars to 412 billion. It grew by 12 billion, and 12 is 3% of 400, so the growth rate is 3%.
Divide by last year’s GDP, the starting point. Use real GDP, explained next.
GDP is counted in money, so it can rise just because prices rose, even if the country made nothing extra. Nominal GDP uses each year’s own prices. Real GDP values every year’s output at the same prices, stripping out price rises. Always work out growth from real GDP.
Trap · Common Misconception
"If prices rose, the growth was fake"
Not every rise in nominal GDP is fake. Say nominal GDP grows 8% in a year when prices rise 5%. Part of the rise was higher prices, but real output still grew, by about 3%.
A recession is a lasting fall in real GDP, spread across the economy. Many countries also measure GDP every quarter (three months). A common rule of thumb is two quarters of falling real GDP in a row. That’s a shortcut, not the only test: many economists also check whether jobs and incomes are falling.
Check yourself · no marks
A friend says: “GDP tells you how much wealth a country has right now.” What’s wrong with that?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Worked Example
From 1960 to 2024, South Korea’s real GDP per person (GDP divided by the number of people) grew by about 5.7% a year on average. Ghana’s grew by about 1.1%. How did that turn almost the same start into a 17-fold gap?
Practice · 1 / 5
Which of these best describes what GDP measures?
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