What is GDP? The most common measure of an economy’s size is its gross domestic product (GDP).
You can calculate GDP for one country or region (such as the USA, Canada, or the UK) or for multiple countries, such as the European Union (EU). The GDP is the sum of all value-added that an economy has created.
What does GDP cover?
The largest portion of GDP is the total value of final products and services that are sold (final, excluding intermediate consumption).
It doesn’t matter if the goods or services produced positively impact the environment or social side.
So, for example, if there is an oil spillage in the ocean, then the cost of transporting the oil and cleaning up the mess is included in GDP.
The GDP also includes the value of products and services that were produced for investment by the producers.
What about the black/grey informal economy?
Unreported transactions, such as simply working illegally (not registering for tax or social security), are included within GDP through estimates.
Cash payments to cleaners whose work isn’t declared to authorities would be one example. Also, estimates should be made for illegal activities involving monetary payments, such as purchasing counterfeit goods, smuggled tobacco, prostitution, and other prohibited drugs.
However, it is difficult to estimate illegal transactions or unreported transactions.
Now that you understand the aspects that are covered in the GDP, let’s learn more about what it doesn’t cover.
What part is GDP missing?
It is important to remember that there is no “right” amount of GDP nor a “right” rate of growth. In fact, positive social and environmental development does not always go hand in hand with Gross Domestic Product growth. We now come to the next point: what does GDP not reflect?
Well, it doesn’t really measure the economic or social situation.
Statisticians have been working for many years to develop frameworks that go beyond national accounts. The developed frameworks can be used to examine issues such as income, living conditions, and environmental accounts.
These frameworks have not been the only ones developed by statisticians, economists, and other social scientists. They also reflect other issues such as happiness, well-being, and many other factors. This work is known within Eurostat as “beyond GDP.” Two other examples of this are the human growth index by the United Nations and the Better Life Index by the OECD.
Does GDP have a ‘family’?
Gross National Income (GNI) is a less well-known relative of the GDP. While GDP is the output of residents, regardless of their nationality, GNI measures income earned outside of the economy by national entities. It excludes income earned by foreign nationals within the domestic economy.
For example, A subsidiary of a multinational corporation owned by foreign investors is found in an economy. Repatriating profits from the subsidiary of a multinational enterprise to its home economy will result in it including them in its GDP but not its GNI. On the other hand, profits will be added to the GNI but not to its GDP.
Let’s take another example. Christophe lives in Belgium but drives to Luxembourg every weekday for work. While the value of his work contributes to Luxembourg’s GDP, it is then added to Belgium’s GNI when the income he earns comes into play.
Although Christophe’s contribution to Belgium’s GDP is not significant, his salary is included in Belgium’s GNI.
In some countries, such as Ireland and Luxembourg, the difference between GNI and GDP can be quite large. This is because these EU Member States are home to many multinational companies. In addition, many people from neighboring countries cross the border to work in Luxembourg.
How does technology affect the GDP?
Understanding the impact of technology on economic growth is crucial for understanding how technological changes contribute to alleviating poverty and other social problems.
While there is not a direct relationship between technological development and economic growth, it is important to have this association.
Technology can impact growth by increasing productivity, expanding markets, and providing opportunities for services and goods. It is believed that technology improvements will result in higher yields per acre and increased food security.
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