Can someone please explain GDP to me?

So I know that GDP is the total value of goods and services produced by/in a country in usually a year (from economics I had in first year), but can someone remind me or tell me how we know when a country is performing good I.t.o. GDP.

I.e. Let’s say a country produced a lot of goods and services, does that make them better then a country that produced less goods and services.

And then again, what about population size? Does that affect GDP? And when I talk about produce, does that include selling as well? Because what is the use producing if you don’t sell any goods?

Can anyone please clarify this for me, but not too complicated (if possible).

Answer #1

I have a book here, which will explain it better than I can.

‘GDP can be calculated in three different ways, which should all result in the same figure. These three methods are illustrated in the circular flow of income in figure 13.2. The first method of measuring GDP is to add up the value of all the goods and services produced in the country, industry by industry. In other words we focus on firms and add up all their production. This first method is known as the product method. The production of goods and services generates income for households in the form of wages and salaries, profits, rent and interest. The second form of measuring GDP, therefore, is to add up all these incomes. This is known as the income method. The third method focuses on the expenditures necessary to purchase the nation’s production. In this simple model of the circular flow of income, with no injections or withdrawals, whatever is produced is sold. The value of what is sold must therefore be the value of what is produced. The expenditure method measures this sales value. Because of the way the calculations are made, the three methods of calculating GDP must yield the same results. ‘

Sloman - Ecomomics 6th Ed.

In other words they all equal one another, and they can be each used to calculate GDP.

So to calculate using the expenditure method this is used:

GDP = private consumption + gross investment + government spending + (exports − imports)

which should help your understanding.

‘Let’s say a country produced a lot of goods and services, does that make them better then a country that produced less goods and services.’

It’s not just about the physical quantity of goods and services, but their value too, but essentially, yes. So a higher GDP is obviously better. It depends on other factors though, such as your population. Obviously country A might have a higher GDP than country B, but that doesn’t mean the citizens of country A are more wealthy, for the GDP per capita (per person) may be less in country A. So you have to split it up per capita. If you’re comparing countries internationally you might want to use GDP ppp, which takes into account exchange rates also.

If you want to look at how well a country is doing, check out its growth figures. So that is how much its GDP is increasing year on year.

‘And then again, what about population size? Does that affect GDP?’

Yes, fundamentals of economics, a country is made up of its scarce resources, ie land, labour, capital and enterprise. GDP is essentially a total of the productive worth of every person in the economy, so population size is very important. The USA isn’t even the richest country on earth if you look at GDP per capita, its might comes from its huge population who have relatively high standards of living. Although there are countries with bigger populations with a smaller GDP, such as China. China has a GDP (ppp) per capita of $5,970, the US $47,440. China has a population of 1.3 billions, the US 300 million. If you do the rough calculations you will find the US economy to be twice the size of China’s, and this is confirmed if you do a search for total GDP ppp for both countries. The USA is richer in total GDP, despite China’s population being some 4 times larger. So population plays a key role, but it’s not the be all and end all.

I feel I may have confused you :)

This is all a bit complicated and I fear I haven’t explained it very well. I’d recommend some basic text book, should help your understanding.

if there’s anything else let me know.

Answer #2

It depends what you mean by whether a ‘country is performing good’.

Gini coefficient isn’t really relevant to your initial question, it’s more to look at income inequalities, ie fairness. GDP isn’t accurate to determine individual wealth, because as thedude pointed it’s an average, and doesn’t take into account income equality. If you want to look at other factors such as how fair a society is, take a look at gini by all means, by the same token there’s another measure to look at how well off the population are, the HDI (Human development index) which takes into consideration the level of education and provision of healthcare available as well as the GDP.

GDP and GDP growth would what would come to mind instantly in terms of how well a country is doing, as I say it depends on just what exactly you want to know.

Answer #3

A country is performing well when it has a high per capita GDP, eg, a high value of goods and services produced for each population unit.

For example, the US per capita GDP is now lower than many European countries :) Those same countries also have a more even (relative to the US) distribution of wealth…wether or not that’s material to a discussion of GDP is relevant or not depends on if you like the idea of the uber rich being far, far above us mere mortals.

A country’s GDP like, say, Maldives where I’m living now can be very misleading when looked at in per capita terms…the per capita GDP is nearly $3,800 however the average salary for a skilled, computer literate, bilingual worker may only be $6,000 per month…and those jobs are rare. More likely, the average worker makes far less than the per capita GDP (perhaps $200 ish per month), eg unskilled labor, etc.

So when you look at Gross Domstic Product to see a countries performance, imho, it’s very important to look at also per capita GDP and take a look at UN related stats on the share of wealth controlled by the top percentage of the population…Sweden, for example, has high GDP, less wealth concentrated in the elite few, and a higher per capita GDP than the US…one might conclude from that set of stats, then, that socialism is good :)

Unless, of course, you’re an apologist for the bourgeoisie and or a Republican (or a member of the uber class).

Answer #4

Thanks guys. That clarifies a lot or should I say my memory is being refreshed.

So just to make sure I am starting to get it again. You would then in short look at GDP and then something like the gini coefficient which determines the distribution of income to determine if a country is doing well?

Answer #5

The HDI (human development index) is actually pretty interesting…it includes notions of religious tolerance (from memory), etc as well as other basic socio economic things so it goes far beyond simple weather distribution and GDP.

But…it’s also problematic and fundamentalists in many religious doctrines view such perspectives as “proof” that the UN and related agencies are out to destroy religion.

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