LeoGlossary: Gross Domestic Product (GDP)
The monetary value of all economic goods and services produced in a country during a certain period of time. This is measured in the native currency. Essentially it is a nation's total economic activity.
GDP is made up of:
- Private expenditures
- Government spending
- Net exports
- Investments
English economist William Petty was the first to suggest the concept during the 1600s. This was further improved by English politician Charles Davenant not long after. Eventually, it was modified by American economist Simon Kuznets about 100 years ago.
GDP Per Capita
One of the drawbacks is that GDP is not the best metric for the wealth of a nation.
To compensate for this, GDP per capita can be used to better judge the standard of living of nation. It provides for better comparison. Since nation report this on a quarterly basis, analysis can be done quickly.
Total GDP is an aggregate, regardless of the population. GDP per capita takes the population in account. China is an example of the distortion that can take place.
The country ranks second in total GDP, only behind the United States. When GDP per capita is taken into account, it drops to near #70.
Drawbacks
GDP has a few drawbacks that should always be considered. There are a number of factors it omits.
- Wealth distribution
- Sustainability
- Non-market transactions
- Quality improvements
- Non-monetary economy
There is also the consideration of the black and gray markets. These are ones where reporting is not done for a variety of reasons. Many try to estimate the output associated with these activities. The markets often emerge through overt criminal activity or for the avoidance of taxes.
It also fails to distinguish how the production is achieved. Government spending in infrastructure can really boost the numbers. The problem is this is usually funded through debt. In the long run, this will have a negative impact upon the economy. Companies also have to finance this spending through the sale of bonds.
This tends to affect the sustainability of the growth rate.
Technology
Another factor that should be considered is the effect of technology on GDP.
Technology tends to be deflationary in the sense it drives prices down over time. This is the nature of it. Either their direct cost reduction or replacement, we see the demonetization.
The result of this can be the same standard with a reduction of economic productivity.
Streaming video versus the renting from a store is an also an example. Under the rental method, one would drive to a store, rent the video and return home. There was also a trip required to take it back.
All of this is in addition to the cost of the video rental. When comparing the Blockbuster fees to that of Netflix, we see a few dollars for each one versus $10 or $12 per month.
Streaming means no leaving of home, cutting into the use of oil (gas), wear and tear on the car, and use of the roads.
The Internet caused a major shift in our products or services are offered. Applications replaced a lot of human labor. It also served to remove intermediaries from the system.
Online brokerage firms, also known as discount brokers, started to reduce the commissions on stocks as compared to traditional Wall Street financial institutions.
Eventually, they eliminated the fees completely. Investments are still made in these assets. The difference is all GDP related to the purchase is now eliminated.
Digital versions of physical items or non-digital services can reduce prices greatly, affecting GDP.
This is causing many to believe it is an outdated metric.
Top 10 Countries By GDP
These are the top 10 countries as measured by GDP:
-
United States
-
China
-
Japan
-
Germany
-
India
-
United Kingdom
-
France
-
Italy
-
Canada
-
Brazil
How to Calculate GDP
- Expenditure Approach:
GDP = C + G + I + NX
C = Consumption G = Government Spending I = Investments NX = Net Exports
- Income Approach:
GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income
