GDP

Economics is no different. Economists use many acronyms. One of the most common is GDP, which stands for gross domestic product. It is often cited in newspapers, on the television news, and in reports by governments, central banks, and the business community. It has become widely used as a reference point for the health of national and global economies. When GDP is growing, especially if inflation is not a problem, workers and businesses are generally better off than when it is not. 

GDP measures the monetary value of final goods and services— that is, those that are bought by the final user—produced in a country in a given period of time (say a quarter or a year). It counts all the output generated within the borders of a country. GDP is composed of goods and services produced for sale in the market and also includes some nonmarket production, such as defense or education services provided by the government. An alternative concept, gross national product, or GNP, counts all the output of the residents of a country. So if a German-owned company has a factory in the United States, the output of this factory would be included in US GDP, but in German GNP. 

Not all productive activity is included in GDP. For example, unpaid work (such as that performed in the home or by volunteers) and black-market activities are not included because they are difficult to measure and value accurately. That means, for example, that a baker who produces a loaf of bread for a customer would contribute to GDP, but would not contribute to GDP if he baked the same loaf for his family. 

One thing people want to know about an economy is whether its total output of goods and services is growing or shrinking. But because GDP is collected at current, or nominal, prices, one cannot compare two periods without making adjustments for inflation. To determine “real” GDP, its nominal value must be adjusted to take into account price changes to allow us to see whether the value of output has gone up because more is being produced or simply because prices have increased. A statistical tool called the price deflator is used to adjust GDP from nominal to constant prices. 

GDP is important because it gives information about the size of the economy and how an economy is performing. The growth rate of real GDP is often used as an indicator of the general health of the economy. In broad terms, an increase in real GDP is interpreted as a sign that the economy is doing well. When real GDP is growing strongly, employment is likely to be increasing as companies hire more workers for their factories and people have more money in their pockets. But real GDP growth does move in cycles over time. Economies are sometimes in periods of boom, and sometimes periods of slow growth or even recession (with the latter sometimes defined as two consecutive quarters in which output declines). In the United States, for example, there were ten recessions of varying length and severity between 1950 and 2017 (see chart). The National Bureau of Economic Research makes the call on the dates of US business cycles. 

It is also important to understand what GDP cannot tell us. GDP is not a measure of the overall standard of living or well-being of a country. Although changes in the output of goods and services per person (GDP per capita) are often used as a measure of whether the average citizen in a country is better or worse off, it does not capture things that may be deemed important to general well-being. So, for example, increased output may come at the cost of environmental damage or other external costs, such as noise. Or it might involve the reduction of leisure time or the depletion of nonrenewable natural resources. The quality of life may also depend on the distribution of GDP among the residents of a country, not just the overall level. To try to account for such factors, the United Nations computes a Human Development Index, which ranks countries not only based on GDP per capita, but on other factors, such as life expectancy, literacy, and school enrollment. Other attempts have been made to account for some of the shortcomings of GDP, such as the Genuine Progress Indicator and the Gross National Happiness Index, but these too have their critics.

Gross Domestic Product: An Economy’s All - Questions

1. It has become widely used as a reference point for the health of national and global economies.

2. When GDP is growing, especially if inflation is not a problem, workers and businesses are generally better off than when it is not.

3. What does GDP measure? GDP measures the monetary value of final goods and services produced in a country in a given period of time.

4. Give two examples of production that is not included in the GDP __a mother or father providing childcare at home, someone baking or cooking for their family, someone volunteering their time at an enimal shelter, black market activities etc.

5. GDP is not a measure of the overall standard of living or well-being of a country.

6. Give four examples of how GDP does not capture 

   1. things that may be deemed important to general well-being

   2. unpaid labor

   3. the value of natural resources

   4. the negative impacts of production (pollution)

7. The quality of life may also depend on the distribution of GDP among the residents of a country, not just the overall level.