Easy – Gross Domestic Product, done, thanks for reading.
Okay but seriously, what does the GDP refer to, and why do people (or rather, certain people) celebrate when it goes higher and not the other way round.
Simply put, if you were to put everything that was produced in the country, in one single bag, and give it all a value, that value would be the country’s GDP. By everything produced, we mean the final product, as in, if we take a car for example, its value when it is sold is added into GDP, but not the individual value of each of its parts. This is done to avoid double counting or showing more value than there really is.
So is GDP just a sum of big numbers?
Well, yes, in fact there’s a specific formula used to calculate it;
C + I + G + ( X - M )
C – Personal Consumption Expenditures (things the average citizen spends money on, from cars to groceries)
I – Business Investments
G – Government Spending
X – Exports
M – Imports
Once you have all the figures named above, and key them into the formula as shown, you have a nation’s GDP.
How come we see many different statistics relating to GDP if there’s only one value?
This is because there are different types of purposes for which GDP is calculated. Lets start from the type which gives us the largest number and track down to the smallest one. We’ll also make use of a mock GDP value to better explain what is happening.
First off you have Nominal GDP – This is the raw measurement of all that we mentioned, including everything from price increases to inflation, and is thus the largest number you will get when calculating GDP.
For our example, lets say we calculate nominal GDP at 10 Trillion euros.
Secondly, you have Real GDP – This is the same number as Nominal GDP, but is deflated as we remove the effects of inflation and exchange rates. We do this for a very simple reason.
If say, a carton of milk rises in price by 15 cents, and we don’t account for that rise, then it may seem as if the value of the carton has risen, when in fact only the value of the currency would have – so in real GDP, we remove that 15c, so that we can still compare the economy to how it was last year, and see if it has grown.
For our example, we would normally calculate real GDP at around 9 Trillion euros.
Thirdly, you have GDP per Capita. This is often used to compare the GDP of different countries, as it divides the value by the number of citizens. By doing this we can take a look at the standard of living of a nation’s citizens. So, although a country with a billion citizens will undoubtedly have a much higher GDP value than one with half a million citizens, if you divide that number by the number of citizens, you will then find out how much each individual ‘costs’ on average.
For our example, lets say our country has half a billion citizens – that puts our GDP per capita at 18,000 euros per person. Our neighboring country has a GDP of only 10 billion euros, but it then has a population of 200,000 – putting their GDP per capita at 50,000 euros per person. This tells us that the citizens living there have a significantly higher standard of living than our own.
Finally, we have GDP growth rate – this is quite self explanatory. It is the rate at which the economy is either growing, or contracting. If it grows way too much, it signals inflation and the country is at risk of losing control of the value of its currency – if it contracts, we’re in a recession and if it contracts for many months, that signals what we know as a depression. So basically, you want to hit a certain sweet spot of sustainable economic growth in order to improve your nation’s standard of living. Most economists agree that this sweet spot lies within the bounds of a 2% growth rate.
So that’s a basic explanation of what GDP is – if this article interested you and you want to learn more, take a look at our previous article ‘WTF is: Inflation’ and stay tuned for our upcoming, ‘How does GDP affect me?’
Written by: Anonymous