Understanding GDP

A Summary

I would like to take a moment to show you a summary of the 13 principal ideas we have discussed. These are the ideas I would like you to remember about GDP.

Harley Hahn

Definition of GDP: The GDP (gross domestic product) of an economic region is an estimate of the monetary value of all the goods and services produced within that region.

Goods and Services: “Goods” are material objects, such as cars or food. “Services” refers to work that is economically valuable but does not produce anything tangible, for example, the work done by doctors, writers, or programmers.

GDP Estimates: GDP estimates are calculated regularly by highly specialized government statisticians.

GDP and Economic Change: We can use GDP values to compare how an economy has changed. For example, the GDP of the United States increased by 4 percent from 2011 to 2012. Thus, we can say that the economy of the United States increased by 4 percent from 2011 to 2012.

Using GDP to Compare Economies: We can use GDP values to compare the economies of two different regions. For example, in 2012, the GDP of the United States was 8.6 times the GDP of Canada. Thus, we can say that, in 2012, the economy of the United States was 8.6 times the size of the Canadian economy.

Exclusions: Some parts of the economy are not counted in GDP calculations. Specifically, GDP estimates do not include the value of goods and services related to the black market, barter, or unpaid labor.

GDP as an Economic Indicator: The GDP is an important economic indicator, used by governments, central banks, and companies to make decisions and to manage resources. GDP estimates are also used as reference points when discussing the economy, for example, in financial news reports.

High GDP + Low Inflation Is Good: A high GDP is better than a low GDP, as long as inflation is not a problem. Thus, one of the long-term goals of both governments and central bankers is to raise the GDP without causing inflation.

Highest GDPs in The World: In 2012, the GDP of the world was $71.707 trillion U.S. dollars. The economic regions with the highest GDPs were the European Union ($16.641) and the United States ($15.685).

Size of an Economic Region: The physical size of an economic region is not the determining factor of its GDP.

Population of an Economic Region: The population of an economic region is not the determining factor of its GDP.

GDP Per Capita: The GDP per capita is calculated by dividing the GDP of an economic region by its population. In 2012, the country with the highest GDP per capita was the small country of Luxembourg: $113,476. To compare, the GDP per capita for the United States was $49,967. The GDP per capita for the world as a whole was $10,160.

Luxembourg’s High GDP: Luxembourg is a business-friendly country, with low corporate taxes, a stable work force, and significant government incentives. These factors have enabled Luxembourg to develop a highly sophisticated, tech-driven service economy, resulting in a very high GDP per capita.

This is one of a multi-part series on Understanding Gross Domestic Product appearing biweekly at independent.com. Next time: “What Makes for a Very High GDP?”

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, and his work is archived by the Special Collections Department of the UC Santa Barbara library. 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.


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