Overview

How do you keep score in the game of nations? GDP (Gross Domestic Product). It is the total price tag of everything a country produces in a year. Every haircut, every car, every apple. It is the most watched number in the world.

Core Idea

The core idea is Production = Income. Every dollar spent by someone is a dollar earned by someone else. So GDP measures both the total spending and the total income of the nation.

Formal Definition

The market value of all final goods and services produced within a country in a given period. Formula: $Y = C + I + G + (X - M)$ (Consumption + Investment + Government Spending + Net Exports).

Intuition

  • The Pie: GDP is the size of the economic pie.
  • GDP Per Capita: The size of the slice each person gets. (GDP / Population). This is a better measure of how rich a country feels.

Examples

  • USA: ~$23 Trillion. The biggest economy.
  • China: ~$18 Trillion. Catching up fast.
  • Luxembourg: Tiny GDP, but huge GDP Per Capita ($130k). They are rich.

Common Misconceptions

  • GDP measures happiness: No. If you crash your car, GDP goes up (because you pay the mechanic and the hospital). It measures activity, not well-being.
  • Stay-at-home moms: Their work (cooking, cleaning, childcare) is worth trillions, but it counts as $0 in GDP because no money changes hands.
  • Real GDP: GDP adjusted for inflation. (If prices double but production stays the same, Nominal GDP doubles, but Real GDP is flat).
  • GNP (Gross National Product): Measures what Americans produce, even if they are in France. GDP measures what is produced in America, even if by a French company.

Applications

  • Recession: Defined as 2 quarters of falling GDP.

Criticism / Limitations

  • The Environment: GDP ignores pollution. Cutting down a rainforest increases GDP (selling timber), but destroys the planet.
  • HDI (Human Development Index): A better score. It includes GDP plus Life Expectancy and Education.

Further Reading

  • Coyle, Diane. GDP: A Brief but Affectionate History.
  • Piketty, Thomas. Capital in the Twenty-First Century.