What Is GDP?

GDP stands for Gross Domestic product, and it measures the size of a country’s economy, over a certain time period (usually quarter or year). In this video we’re gonna find out how GDP is measured, why it is important, and whether or not there are any disadvantages to using GDP to calculate the size of a country’s economy.

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GDP can be measured in 3 ways, firstly by looking at everyone’s income over the period, which includes the profits businesses make. Secondly it can be calculated by adding up what everyone has spent, this is mostly made of household spending but it also includes what the government spends in terms of investment and subsidies, as well what we buy from abroad which are called exports. Thirdly GDP can be worked out by adding up the total value of all goods and services produced by a country. The ONS, which calculates the GDP for the UK, uses all 3, but GDP is mostly calculated by adding up what everyone has spent.

But why is GDP so important? GDP is important because it is a measure of a country’s economic health which can be used to compare it to other countries. When GDP goes up, it means the economy is growing, more people are employed and are spending more, and businesses are expanding. When it goes down, the opposite is happening, people are spending less, and businesses shrink as they are not getting enough revenue, meaning people might get laid off, and unemployment goes up.

GDP also gives economists at central banks an important insight into the health of the economy which helps them know whether to adjust things like interest rates, to help slow down or speed up the economy. Raising interest rates encourages people to save money, thus slowing down the economy, lowering interest rates does the inverse, it pushes people to spend, which speeds up the economy. Studying GDP can also push economists to look at other factors to try to find out why a country’s economy is in a certain state For example, if economist study trade, they might see that the country imports more goods than it exports, meaning trade deficit goes up, more money is being spent overseas, which shrinks GDP. If on the other hand a country exports more than it imports,it means there is more money coming from overseas, into the country and GDP resultantly goes up.

However, GDP is not the only way to measure a country’s economic health. As the previous example just highlighted, GDP does not account for the economic output of residents of a country working overseas, for example the economic output of a german factory in the USA would contribute to the GDP of the USA not to Germany’s. GNP, or Gross National Product, can be used to remedy this. GNP calculates the size of the economy that residents of a country are part of, so the Germany factory in the USA would register as part of Germany’s GNP, whereas GDP is more geographical, just calculating the size of a country’s economy within its borders.

As well as this GDP does not show how the economy of a country is split, so even if GDP is growing, and thus the economy on the rise, this doesn’t mean its effects are being equally shared. Moreover Population needs to be taken into account when calculating GDP,if population outgrows GDP, and GDP actually stays the same or increases very little over the time period, per person or per capita GDP has actually fallen. Inflation also needs to be borne in mind when calculating GDP, something which can be resolved by calculating real GDP, which adds the effect of inflation on top of a country’s GDP. Last, but not least, GDP is not a measure of quality of life, it doesn’t measure how happy or healthy people are, it is purely an economic measure.

Sources: https://docs.google.com/document/d/e/2PACX-1vRYEhroa19A_nOzpITRySJA2Ua9hoBQxzh7rUs1XeGrtyRMY2jsR0J1-zs5dW2UqilK0QcmL-lfKFUB/pub

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