GDP, GNP – what does it all mean? Jonathan explains what economists mean when they bring up these common economic indicators.
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OK, let’s say you’ve just gotten a job offer to work in the majestic country of Bumpsylvania. Awesome, right?
You’ve always wanted to live amongst the scenic Bumpsylvanian swamplands and hear the local ghost toads sing their famous mating screech.
But before you pony up the $549.95 for Rosetta Stone: Bumpsylvanian Edition, you want to do a little research on the economic health of this country. So you ask your friend the economics professor: How is the economy of Bumpsylvania doing these days?
One number that will almost definitely figure into her reply is the country’s GDP. This stands for Gross Domestic Product.
GDP is a common measure that’s used to roughly represent the size of a country’s economy. The way you calculate GDP is both simple as a general principle, and complicated in the details.
The simple version is that GDP is the value of all the goods and services produced within a country in a given period of time, such as a financial quarter or a year.
So if we look at Bumpsylvania, we can calculate its yearly GDP by adding up the dollar-value of all the stuff it creates: All the pork sandwiches, shoe shines, fashion magazines, bullets, massages, motorcycles, jiu-jitsu classes, ghost toad swamp tours, and, of course, traditional, Bumpsylvanian-style wooden hats. Every item, product or service brought to market by workers or other economic resources located inside the country in that year is part of the GDP.
Coming up with this figure is not as easy as it sounds. GDP is actually a highly complex and abstract statistical instrument that takes some real work to calculate.
Just one example of the many complications: Let’s say somebody cuts down some swamp trees and turns those trees into lumber, and then sells that lumber to a haberdasher who turns it into a traditional, Bumpsylvanian-style wooden hat. Do you count the sales of both the lumber _and_ the hat?
Well, no, because GDP is a measure of the final value of goods and services. So if you counted the sale of the wood to the hat-maker and the sale of the hat, you’d be counting the same value twice. The value of the wood gets wrapped into the final value of that gorgeous, gorgeous headgear.
GDP is probably the most important measure of the size and performance of an economy, but it’s not the only one. There’s also GNP, which is related, but slightly different.
GNP stands for gross national product. The difference is that GNP is the value of all the products and services produced by a country’s residents, even if production takes place outside of the country.
So if a Bumpsylvanian business has a factory making wooden hats in another country, the output of that factory would be included in Bumpsylvania’s GNP, but not its GDP.
While GDP is a widely used indicator of economic strength, many critics point out that it’s not necessarily the best indicator of the “real” health of a nation.
For example, a country with a large, growing GDP might look strong on paper, but what if that number is masking vast income inequality – a productive economy based on huge amounts of low-wage labor? Of course by comparing GDP with other pieces of data, you can do more with the figure.
A simple example would be comparing GDP with population to come up with Per Capita GDP (which means economic value per person).
So for example, according to the World Bank, in 2013, China’s GDP was a massive $9.2 trillion. Compare that to Luxembourg’s relatively small GDP of $60 billion.
Yet in the same year, China’s GDP Per Capita was only about $6,800, while Luxembourg’s was more than 16 times that, at about $110,000. So while China’s economy is certainly much larger, it looks like each individual citizen, on average, is better off in Luxembourg. Financially speaking, that is.