Understanding Gross Domestic Product

Introduction to and Some Examples from the Series

When economists analyze the economy, one of the most important numbers they use is the gross domestic product or GDP. The gross domestic product is an estimate of the monetary value of all the goods and services produced within a specific region of the world during a certain time period. (We will discuss the idea of “goods and services” next time.)

Economists often look at the GDP for an entire country for one year. For example, I might tell you that, in 2012, the GDP of the United States was \$15.68 trillion. This means that, in 2012, the United States as a whole produced \$15.68 trillion worth of goods and services.

We tend to use GDP values in two important ways — first, to measure economic progress over time. For example, if we want to see how much the economy of the United States is expanding, all we need to do is look at the change in its GDP from one year to the next.

Second, we can use GDP values to compare different countries or regions to one another. For instance, suppose we want to estimate how much bigger the United States economy is than, say, the Canadian economy. All we have to do is compare the U.S. GDP to the Canadian GDP. Similarly, if we want to compare the economy of the European Union to the economy of China, we can compare the GDP of the European Union to the GDP of China.

In these essays, I will explain the basic concepts regarding GDP. We will then take a look at GDP values for various parts of the world, analyze them in several ways, and then discuss the ways in which such values are used. Finally, we will look at the factors that influence the GDP of a country and why they are important.

A Few Quick Examples

Before we get into the technical details, let’s take a look at the actual values for the GDPs I mentioned above. The numbers I will show you are estimates in U.S. dollars and are based on statistics for 2012 (the most current year, as I write this, for which reliable numbers are readily available). To start, let’s look at the growth of the U.S. economy from 2011 to 2012.

In 2011, the GDP of the United States was \$15.07 trillion. In 2012, the U.S. GDP was \$15.68 trillion. Let’s subtract the first number from the second:

\$15.68 trillion – \$15.07 trillion = \$609 billion:

This shows us that the U.S. gross domestic product grew by \$609 billion, which is an increase of 4 percent. Thus, we can say that, from 2011 to 2012, the U.S. economy grew by 4 percent.

Now, let us compare the United States economy to the Canadian economy. In 2012, the U.S. GDP was \$15.68 trillion, while the Canadian GDP was \$1.82 trillion. Let’s divide the U.S. GDP by the Canadian GDP:

15.68 / 1.82 = 8.6

This shows is that the U.S. economy is about 8.6 times the size of the Canadian economy. Conversely, the Canadian economy is 1/8.6 (11.6%) the size of the U.S. economy.

Finally, let us compare the economy of China to the economy of the European Union. (The European Union, or EU, is an economic and political union of 28 different countries.) This is an interesting comparison, because both China and the EU are very large geographically. China, however, has the largest population of any country in the world, about 1.35 billion people, where the EU has a population of only 0.50 billion (500 million) people.

Before we start, let’s compare the population of China to the population of the EU:

1.35 / 0.50 = 2.7

As you can see, China has 2.7 times the population of the EU.

Now, in 2012, the Chinese GDP was \$8.23 trillion, and the EU GDP was \$16.58 trillion. To see how they compare, let’s divide the EU GDP by the Chinese GDP:

\$16.58 trillion / \$8.23 trillion = 2.01

This shows us that the economy of the EU is a bit more than twice the size of the economy of China, even though the EU has a much smaller population. Thus, we can see that, economically, the European Union is far more productive than China. Specifically, in 2012, the EU produced more than twice the value of goods and services than did China, even though China has 2.7 times as many people as the EU.

This is the first of a 13-part series on Understanding Gross Domestic Product appearing biweekly at independent.com. The next column topic is “What Are ‘Goods and Services’?”

Harley Hahn has a degree in mathematics and computer science from the University of Waterloo in Canada, a graduate degree in Computer Science from UC San Diego, and has studied medicine at the University of Toronto Medical School. Hahn is a writer, philosopher, humorist, and computer expert. In all, he has written 30 books that have sold more than 2 million copies. Hahn has written widely about money and economics, and is also an accomplished abstract artist and a skilled musician. See more at www.harley.com.