In the last article, ‘WTF is: GDP’ I tried to briefly explain what GDP is and how its calculated – but a very often asked question does remain…How does it affect us? Sure, governments tend to do well politically when GDP is high, and people seem to be more satisfied when it is – but when you think about it, if someone didn’t tell you how much GDP grew, would you really notice?
Economists have tried to develop measurements that come closer to how GDP is affecting the individual citizen, mostly by refining already known methods to a very detailed extent. Remember when, in the last article, we spoke of Real GDP and GDP per capita? One negated the effect of inflation, and the other divided GDP by the population to come to a ‘per individual’ measurement.
Add these two methods together, and you have Real GDP per capita (pretty uninventive right?). Real GDP per capita divides GDP by the population, adjusts it for inflation with real GDP, then continues by adjusting further for ‘purchasing power parity’, which is basically a metric economists use to compare different currencies by comparing groups of goods and services in order to figure out the standard of living attainable.
Lets try out an example to better understand Purchasing Power Parity (PPP). Say you’re walking through Valletta, and you notice a shirt in a shop window, that costs €15. Now say someone else is walking in New York, and sees an identical shirt that costs $20. To make a comparison, we can convert our €15 to dollars, which comes to $17.55 – this means that the PPP is 17.55/20, or 0.88. So, in this case, for every $1 spent on the shirt in New York, it would take $0.80 in Valletta.
Then there is the Human Development Index, which was developed in collaboration with the United Nations Development Programme, which also includes metrics such as life expectancy and education.
One of the most significant ways in which these numbers affect you directly, is employment. GDP and Employment rates generally go hand in hand, and if GDP numbers dip, production dips, people spend less, others earn less, so they’re bound to employ less, which means the unemployed spend even less etc. etc. Other factors include investments, whereby GDP can give or lose the confidence of investors in an economy, to which external investment is always needed. Political stability is another issue – whereas strong performances tend to be followed by positivity and a more optimistic monetary policy, weak ones can lead to instability and less expenditure, which can greatly harm a nation if it does not have strong institutions that can resist tougher times.
In general, GDP and its effects move in quite a harmonious manner, at least numerically – one reflects the other, but what we must remember is that they are not simple numbers that can be shifted by one measure or project, as politicians tend to make it seem when elections are near. Just as the average of 1,2, and 3, fails to reflect 1 and 2, a number like GDP is only an aggregate of millions of factors that surround the society we live in, and should only be used as a general indication, rather than the entire case for a country’s economic health.
Written by: Anonymous