GDP – What is it and why is it important?

  • Gross domestic product has been used to measure economic growth since 1937.
  • But new tools are needed to measure the well-being of countries and their people, experts say.
  • GDP is based on the total value of all goods and services produced in a country.

It’s been the standard measure of economic growth for more than 70 years, but gross domestic product (GDP) is starting to look outdated, some experts say.

Indeed, as a key indicator of global progress, it is unable to capture and measure human, social or natural capital.

So what can GDP tell us about the states of our nations and why is it important?

What is GDP?

GDP measures the health of national and global economies, explains the International Monetary Fund (IMF).

GDP data is based on the total final value of all goods and services produced in a country over a given period.

The GDP measure indicates the size and growth rate of an economy.

There are three ways to calculate GDP, explains the Bank of England, the UK’s central bank. You can add up the total value of goods and services produced in a country – or you can add up everyone’s income. The third way to calculate GDP is to measure what everyone in the country has spent. This includes household expenditure, investment, government expenditure and net exports – the value of your country’s exports to other countries minus the value of imports to your country.

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GDP was first proposed as a concept during America’s Great Depression in 1937, according to financial news site Investopedia. Economist Simon Kuznets proposed it in a report to the US Congress. It was then widely adopted as the standard way of measuring national economies.

Why is GDP important?

GDP helps policymakers, investors, and businesses make decisions by understanding the health of an economy, Investopedia explains.

It can be used to compare different countries and regions.

When GDP is growing, workers and businesses are generally better off than when it isn’t, according to the IMF.

“When GDP declines…employment often declines,” the IMF adds.

GDP helps governments decide “how much to spend on public services and how much to raise in taxes”, explains the BBC.

If the GDP falls for two consecutive quarters, it shows that the economy is in recession. This may mean “a wage freeze and job losses”, adds the BBC.

Overall, the war in Ukraine should contribute to a “significant slowdown” in growth this year, warns the IMF. Using real GDP data – which strips out the effect of inflation on goods and services – the IMF projects that global growth will slow from around 6.1% in 2021 to 3.6% in 2022 and 2023.

How reliable is GDP as a contemporary measure of economic health?

Image: IMF

What do GDP experts say?

Experts say GDP is an imperfect measure of the health of an economy, for a variety of reasons.

For example, GDP does not measure population growth. If GDP in the UK grew by 2%, but population grew by 4%, the average income per person would actually have fallen, says the Bank of England.

There are also things that inflate the GDP, but do not make the country more prosperous.

Government spending on war, for example, can boost GDP. Cutting down part of the Amazon rainforest and selling the timber could also result in higher GDP – “but at huge environmental cost”, adds the Bank of England.

A growing argument against GDP is that it does not measure the well-being of a country and its people. Well-being, equality and inclusion are key metrics of global sustainable development – ​​and in this context, GDP “struggles to stay relevant,” suggests the World Economic Forum on its platform” Beyond GDP”.

In an in-depth explanation of GDP in 2016, Jennifer Blanke, former chief economist of the Forum, lists three key areas that GDP overlooks. “Is growth fair, is it green and does it improve our lives? she asked.

Another paper for the Forum at the Washington Center for Equitable Growth, a research and grantmaking organization focused on economic inequality, says new measures of wellbeing are “long overdue.”

Melvin B. Baillie