In , the ONS started measuring well-being alongside economic growth. This measures health, relationships, education and skills, as well as personal finances and the environment. In , New Zealand's Prime Minister, Jacinda Ardern, released the country's first "well-being budget", prioritising health and life-satisfaction rather than economic growth. Despite its limitations, GDP is still the most widely-used measure for most government decisions and international comparisons.
Weak pound boosting UK tourism industry. UK consumer spending growth 'falls to record low'. Does GDP tell the whole economic story? Image source, Getty Images.
What is GDP? What is a recession and how will it affect me? How does GDP affect me? Image source, Reuters. GDP figures are central to the decisions the Chancellor, Rishi Sunak, will make about running the economy.
Where does the government borrow billions from? National GNP In contrast, "National" in "Gross National Product" indicates that the inclusion criterion is based on citizenship nationality : goods and services are counted when produced by a national of the country, regardless of where the production physically takes place.
It allows us to determine whether the value of output has changed because more is being produced or simply because prices have increased. GDP can be calculated in three ways: using the production, expenditure, or income approach. All methods should give the same result.
GDP is usually calculated by the national statistical agency of the country following the international standard. With GNI, the income of a country is calculated as its domestic income, plus its indirect business taxes and depreciation as well as its net foreign factor income. The figure for net foreign factor income is calculated by subtracting all payments made to foreign companies and individuals from all payments made to domestic businesses.
In an increasingly global economy, GNI has been put forward as a potentially better metric for overall economic health than GDP. Because certain countries have most of their income withdrawn abroad by foreign corporations and individuals, their GDP figure is much higher than the figure that represents their GNI. On the contrary, in the U. In , U. Part of the reason for this is that population size and cost of living are not consistent around the world. For example, comparing the nominal GDP of China to the nominal GDP of Ireland would not provide much meaningful information about the realities of living in those countries because China has approximately times the population of Ireland.
To help solve this problem, statisticians sometimes compare GDP per capita between countries. Even so, the measure is still imperfect. Purchasing power parity PPP attempts to solve this problem by comparing how many goods and services an exchange-rate-adjusted unit of money can purchase in different countries—comparing the price of an item, or basket of items, in two countries after adjusting for the exchange rate between the two, in effect.
Real per-capita GDP, adjusted for purchasing power parity, is a heavily refined statistic to measure true income, which is an important element of well-being. In nominal terms, the worker in Ireland is better off. Most nations release GDP data every month and quarter. The BEA releases are exhaustive and contain a wealth of detail, enabling economists and investors to obtain information and insights on various aspects of the economy.
However, GDP data can have an impact on markets if the actual numbers differ considerably from expectations. Because GDP provides a direct indication of the health and growth of the economy, businesses can use GDP as a guide to their business strategy. Government entities, such as the Fed in the U. If the growth rate is slowing, they might implement an expansionary monetary policy to try to boost the economy.
If the growth rate is robust, they might use monetary policy to slow things down to try to ward off inflation. Real GDP is the indicator that says the most about the health of the economy. It is widely followed and discussed by economists, analysts, investors, and policy-makers. The advance release of the latest data will almost always move markets, although that impact can be limited, as noted above.
Investors watch GDP since it provides a framework for decision-making. Comparing the GDP growth rates of different countries can play a part in asset allocation, aiding decisions about whether to invest in fast-growing economies abroad—and if so, which ones.
One interesting metric that investors can use to get some sense of the valuation of an equity market is the ratio of total market capitalization to GDP , expressed as a percentage. Just as stocks in different sectors trade at widely divergent price-to-sales ratios, different nations trade at market-cap-to-GDP ratios that are literally all over the map.
For example, according to the World Bank, the U. However, the utility of this ratio lies in comparing it to historical norms for a particular nation. As an example, the U.
In retrospect, these represented zones of substantial overvaluation and undervaluation, respectively, for U. The biggest downside of this data is its lack of timeliness; investors only get one update per quarter, and revisions can be large enough to significantly alter the percentage change in GDP. The concept of GDP was first proposed in in a report to the U. At the time, the preeminent system of measurement was GNP.
After the Bretton Woods conference in , GDP was widely adopted as the standard means for measuring national economies, although ironically, the U. Beginning in the s, however, some economists and policy-makers began to question GDP.
In other words, these critics drew attention to a distinction between economic progress and social progress. There are, of course, drawbacks to using GDP as an indicator. In addition to the lack of timeliness, some criticisms of GDP as a measure are:. The World Bank hosts one of the most reliable web-based databases. It has one of the best and most comprehensive lists of countries for which it tracks GDP data.
The only drawback to using a Fed database is a lack of updating in GDP data and an absence of data for certain countries. Department of Commerce , issues its own analysis document with each GDP release, which is a great investor tool for analyzing figures and trends and reading highlights of the very lengthy full release.
Countries with larger GDPs will have a greater amount of goods and services generated within them, and will generally have a higher standard of living. Due to various limitations, however, many economists have argued that GDP should not be used as a proxy for overall economic success, much less the success of a society more generally.
However, their ranking differs depending on how you measure GDP. Example When Alessandro is at home and cleans the house, cooks dinner, washes and irons clothes or babysits for his younger brothers or sisters, none of that contributes to GDP. However, if he was paid to do any of those services for someone else, for example cleaning, cooking, ironing or babysitting in a hotel, this would contribute to GDP.
Unreported transactions, such as simply working illegally not registered for tax and social security , are included in GDP through estimates. An example would be cash payments to a cleaner whose work is not declared to the authorities. Estimates should also be made for illegal activities which involve monetary payment, such as buying counterfeit goods, smuggled cigarettes, prostitution and prohibited drugs.
Making these estimates for unreported transactions and illegal activities is not easy: more information can be found in a separate article.
GDP growth does not necessarily go hand in hand with positive social or environmental development in an economy. This brings us to the next point … what GDP does not reflect. It does not measure the social or environmental situation of an economy. For many years, statisticians have worked on developing frameworks other than national accounts to look at these issues, for example surveys on income and living conditions and environmental accounts. As well as these frameworks there have been efforts by various organisations, statisticians, economists and other social scientists to produce indicators with broader measures than GDP, that reflect other issues, including for example happiness or well-being.
GDP measures the production of resident entities regardless of nationality within the economy, while GNI includes the income earned outside the economy by national entities and excludes the income earned by foreign nationals in the domestic economy.
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