GDP

Measurement of economic growth

Definition - Value of all final goods and services produced in an economy in a year.

• If it increases, incomes are likely to increase

• Fluctuates with the business cycle - exists because of external shocks e.g. Covid, Brexit, 2008 recession

  • Boom - more likely to invest in capital, fixed assets, non-current assets (factories etc)

  • Recession - businesses less likely to invest because they expect less sales

  • Depression

  • Recovery - businesses likely to restock

  • Boom (higher than the first - economy gradually increases over the long term)

All businesses are affected but the level of impact is dependent on the YED (income elasticity)

If GDP increases by 10% and incomes increase by 10%

• YED with +0.3 = 3% increase in sales (income inelastic)

• YED with +2.5 = 25% increase in sales (income elastic)