MSG Team's other articles

9066 Economics of Human Resources Management: Hiring, Firing, and Reward Systems

The Changing Emphasis of HR Decisions Despite the widespread impression that Human Resources is distinct from the other profit generating and economic functions such as Production, Sales, Marketing, and Core Competency driven work, the HR function is indeed driven as much by concerns over hiring and retaining the best talent as well as empowering and […]

10245 Role of a Managerial Economist

A managerial economist helps the management by using his analytical skills and highly developed techniques in solving complex issues of successful decision-making and future advanced planning. The role of managerial economist can be summarized as follows: He/She studies the economic patterns at macro-level and analysis it’s significance to the specific firm he is working in. […]

8779 What is Quantitative Easing ?

Quantitative easing is an alternative way that modern central banks have invented to prop up the economy in a short period of time after a crisis. This technique was extensively used by the Federal Reserve i.e. the central bank of the United States to prop up the economy after the slump of 2008. The Fed […]

9906 The Indian Real Estate Market

In the previous couple of articles we have discussed about the real estate markets in the United States as well as Japan. These markets were of developed countries and their economies are largely self sufficient. However, India is a developing economy with a very different case. It has seen rapid growth in the 1990’s and […]

12471 The Big Fall: Lehman Brothers

History Lehman Brothers started as a grocery store in Alabama in 1844. Over the years Lehman Brothers grew into a global behemoth. This growth continued till 2008. Lehman Brothers was the fifth largest investment bank in the world and had over 25,000 people directly on its payroll as well as several thousand people indirectly dependent […]

Search with tags

  • No tags available.

Gross domestic product (GDP), this is a term which is familiar to pretty much anybody who has ever read any newspaper. This number is considered by many to be the most important indicator of the state of the economy. However, how little clarity we have on the subject is remarkable. The average public is not completely ignorant about what GDP is. They do have some idea about the GDP number and its importance. The issue is that they harbor a lot of wrong notions about this subject. If many economists are to be believed, these wrong notions are extremely dangerous and may have in fact played a huge part in the recent economic crisis that halted the growth of the global economy.

All these arguments, the pros and cons make any sense only after we have a clear idea about what GDP is. This article is meant to clarify the purpose of GDP number:

Absence of a Barometer for the economy

In older days, statesmen found that gauging the health of the economy at any given point was a very difficult task. Any policies meant for the improvement of the economy could only be implemented if the present state of the economy was known. However, economy is a very complex system. There are numerous factors like employment levels, inflation levels, debt levels etc that need to be considered before any conclusion about the present state of the economy can be arrived at. Therefore, the answer to the question “How is the economy doing?” was pretty complex.

The statesmen wanted a simpler answer, a simple barometer that would tell them the current state of the economy. They could then use this information to formulate policies. GDP was the end result of this quest. The main reason of GDP is to communicate to the general public information regarding the health of the economy.

GDP-Composite Metric

The GDP number, therefore, in many ways is a composite metric. The purpose of GDP is to assimilate all the information is all metrics like inflation numbers, debt numbers etc and present it to the general public and the policymakers in the form of actionable information.

GDP-Quantifiable Fact

Secondly, GDP is meant to free economists from the realm of opinions. Prior to GDP, any conclusion regarding the state of the economy was purely based on opinions and had very less backing in the form of quantitative evidence. With GDP, this has changed and the average person can state with precision the direction as well as the magnitude in which economic movement has occurred.

GDP-Common Sense and Intuitive

The GDP number is considered so important because of its perceived simplicity. While many economic indicators are complex to decipher, the GDP number is extremely simple. If the number goes up, it means good news and if the number goes down it means bad news, that’s it! The magnitude of this good or bad news is also stated in terms of percentages. Hence, the number is exceedingly simple to interpret.

Definition:

The textbook definition of GDP is

“Gross domestic product (GDP) includes the monetary value of all goods and services which are produced within the geographical boundaries of a given country in a given time frame”

Notice the defining criteria. Production should have happened within the country’s boundaries and within a given time period.

The Logic behind the GPD Idea

The logic behind the GDP idea is simple as well. Economists have discovered through empirical analysis that if the production within a country increases, then so does the employment and the inflation comes under control and so on.

All major measures which correlate to the good health of the economy are also correlated with the Gross domestic product (GDP). Hence, when the news that GDP has grown spreads into the economy, the common population assumes that the economy is in a very healthy state. As we shall see in the rest of this module, this is a false assumption.

It is possible for the GDP to grow when all the underlying metrics are in fact declining. In this case, the link between GDP and the underlying economic growth is broken and the GDP number becomes misleading at least and dangerous at worst!

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

Components of GDP

MSG Team

China’s Modern Day Ghost Cities

MSG Team

GDP: The Broken Window Fallacy

MSG Team