One of the most common economic indicators discussed in media, government, and business professionals is the Gross Domestic Product (GDP). GDP is an indicator of a country’s economic health both in terms of how it changes each quarter and how a country stacks up compared to other countries. Typically GDP is calculated as follows:
While there are variations, particularly in how broad inputs like consumption or investment are calculated, this is the basis of how GDP is calculated for a country.
By incorporating the factors above GDP functions as an approximation of the total production that occurs within a country’s borders.
While GDP as a total figure is important, in terms of how it quantifies a country’s total production, how GDP changes from quarter to quarter and from year to year is an even more important measure of a countries economic health. A country’s GDP growth rate is crucial in terms of the need for a countries growth in production to both exceed inflation and provide jobs and opportunities to a growing population. If GDP growth doesn’t exceed inflation in the country then it is declining in real terms of overall production. Additionally, if GDP isn’t growing fast enough to accommodate for the needs of a growing population, and the jobs they need, then while the total number may grow up there is less to go around for each individual.
What’s generally considered an acceptable GDP growth rate varies from country to country. Developed and more mature economies (i.e. the U.S. or Canada) generally have lower GDP growth rates than developing and less mature economies (i.e. China or Indonesia). This is largely due to the fact that less developed economies are adopting technology and practices that already exist in developed countries and have a great deal of room to grow in terms of their economic development. As the individuals in those countries become more efficient in terms of their contribution to the economy for every hour worked, the GDP aggregates all of that into a higher growth rate. Additionally, many of these countries are still seeing the growth of a significant middle class (that already exists in developed economies) and the growth in consumption spending that that entails.
One GDP-related figure where developing and developed countries vary greatly is the GDP per capita, which takes the total GDP of the country and divides it by the total population of the country. This is important as it shows the relative production per individual in the country and can show significantly different levels between countries. So while the U.S. has the highest total GDP ($16.8 trillion) and China has the second-highest ($9.5 trillion), the U.S. is 9th in the world at GDP per capita ($53k) and China is 82nd ($7k), using International Monetary Fund 2013 figures.
So while China’s total GDP is impressive, it’s less impressive when you consider it’s taking 4.25 times as many people to do so. GDP per capita and the growth in GDP per capita is nearly, if not more so, as important as the actual total GDP growth.
GDP growth is an incredibly important economic growth measure, even if some individuals prefer to use different economic measures and consider them to be better. While inflation-adjusted (real) GDP, or Gross National Income (GNI), are both useful measures they start with GDP itself as a baseline for further refinement or adjustment. For the foreseeable future GDP will continue to be the most important economic indicator, specifically GDP growth rates, in terms of assessing a country’s overall economic health and how that country is trending over time.