The economics of ... GDP

How to compare the wealth of countries / 55

Hello,

How prosperous is your country?

To find out, we generally use a term that is among the most often used in economic texts: GDP.

What does this term mean? And how useful is it?

GDP stands for Gross Domestic Product, and it is the most common indicator of a country’s wealth.

What kind of wealth is measured by GDP?

GDP measures all final goods and services produced and sold in a specific time period by a country.

"Final" means that they have been purchased for final use, so they will not be resold or used in production within the time period. 

So if you go to the hairdresser, that goes into the GDP. Or if you buy a product produced in your country. 

As the letter "D", for domestic, in the abbreviation suggests, GDP refers to everything that is produced within a country, also from foreigners living in a country. Conversely, what the citizens of a country produce who work abroad does not flow into GDP.

More important than this is the question of what GDP says about the prosperity of a country. 

Unsurprisingly, populous countries tend to have higher GDPs.

Only by dividing the GDP by the number of inhabitants of a country you can get an idea of the prosperity of a country. The ratio of GDP to the total population of the region is called the per capita GDP. 

GDP per capita is already a good indicator to make prosperity between countries comparable.

But you can often buy more with the same money in one country than in another.

It is then said that the purchasing power is different.

Different purchasing power makes it difficult to compare countries by GDP per capita.

For example, if prices in one country are twice as high as in another country but the GDP per capita is also twice the size of that other country, then both countries have about the same level of prosperity.  

So purchasing power is very important when it comes to how prosperous a country is in comparison. 

If you take purchasing power into account, you'll get the GDP per capita at purchasing power parity (PPP).

GDP (PPP) per capita is probably the most useful indicator to compare wealth between countries. 

Measured by this wealth indicator, Luxembourg, Liechtenstein and Singapore are the three richest countries in the world; the US is 8th, Russia 55th, and China only 72nd. 

Of course, one can criticise this measurement of prosperity.

There is a lot of prosperity that does not flow into the concept of GDP. Leisure, health, happiness, and nature, for example. In short, every non-monetary aspect of prosperity is not part of the GDP concept. 

As a result, numerous alternative indices have emerged over the past few decades. Also: There are a lot of discussions about how to measure GDP and its variants properly. – But enough abbreviations for today, these are topics for future Strolling Economist posts.

Have a prosperous day, 

Johannes 

PS: Germany, where I live, is the 18th richest country in the world in terms of GDP (PPP) per capita. Here is the complete list. 

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Sources: 

https://www.cliffsnotes.com/study-guides/economics/gdp-inflation-and-unemployment/gdp 

https://www.aei.org/research-products/report/what-is-prosperity-and-how-do-we-measure-it/ 

https://www.investopedia.com/updates/purchasing-power-parity-ppp/ 

https://en.wikipedia.org/wiki/Gross_domestic_product