Economics: What is GDP???

Difficulty: 1/3 (Not a bad way to start macro-economics)
Review: 4/5 (Pretty well explained)

With the new year coming around, this blog's focus will shift from microeconomics to macroeconomics. But what is the difference? Microeconomics focuses on how individual households and firms make decisions and how they interact with one another. On the other hand, macroeconomics is the study of entire economies, where changes simultaneously affect many households, firms, and even markets.

The first topic of macroeconomics we will learn is GDP - gross domestic product, the most important economic statistic because it is thought as the best single measure of a country's economic well-being. GDP is the total income of a country and also the total expenditures of a country. This is because income equals expenditure, since every transaction has a buyer and a seller.

GDP per capita is the average person's income.

Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time.

-GDP adds all products together to one measurement, for example if an apple was priced twice an orange, an apple contributes twice as much to GDP.

-It also tries to be comprehensive, including intangible and tangible products and services. The government has to estimate the GDP of some things like owned houses, in this case as if the owner was self-renting. It also excludes illicit transactions like illegal drugs.

-The GDP only counts final goods, meaning it doesn't count intermediate goods. For example, if there was paper produced only to be made into a Hallmark greeting card, the GDP only calculates the value of the greeting card. There is an exception to this principle if the intermediate good is going to be stored for the future, in this case, its value as an inventory investment is added to GDP.

-GDP is confined to the country in which it is calculated. An American-owned factory in Haiti is part of Haiti's GDP rather than America's. A Canadian temporarily working in the U.S. contributes to American GDP for the duration he stays in America.

-GDP is measured in a specific time interval. Usually that interval is a year or a quarter (three months). Quarterly calculated GDP is then multiplied by 4 to represent annual GDP. Statisticians also use something called seasonal adjustment to account for holiday shopping season and other miscellaneous patterns in order to look past them.

The components of GDP are consumption, investment, government purchases, and net exports. Consumption is spending on goods and services. Investment is spending on capital equipment, inventories and structures (including new housing). Government purchases (otherwise called government consumption expenditure and gross investment) is spending by the government. Note that this does not include transfer payments like Social Security because it is not an exchange for a currently produced good. Finally, net exports are domestically produced goods shipped to foreign countries minus imports.

Nominal GDP is calculated using the current prices, Real GDP sets a previous GDP's prices as a base price, and calculates GDP based off of those old prices. Real GDP reflects changes in output and is more useful. GDP deflator is Nominal GDP divided by Real GDP multiplied by 100, and shows percent change in price.

Why does GDP matter? It matters because a larger GDP has positive correlation with a better quality life. This is because nations with larger GDP can afford better healthcare, education, and more. They can focus on laudable attributes instead of acquiring material necessities for living.

However, GDP is not a perfect measure of well-being. One incredibly high income person could offset the rest of the population by appearing to give them a high GDP. Transactions taking place within the home are not calculated either (for example a chef making dinner for the family). Volunteer work is also excluded.

Still, GDP is an important measurement to economists. But measurement is only a starting point. In the future, we will learn how governments use GDP to promote growth, why Japan has more GDP than Nigeria, and other interesting topics in the grand scale of macroeconomics.