what is “GDP” and why is it such an important economic indicator?

Question

what is “GDP” and why is it such an important economic indicator?

In: 4

Answer 1

GDP means ‘Gross Domestic Product’ and it’s the total amount of money made by selling new goods and services in a specific country, state, city, etc.

Let’s imagine we have the world’s smallest country of 2 people. If Person A sells Person B a pencil worth $1, then the country’s GDP is $1.

If Person B sells Person A back the pencil for $3, this is not counted in the GDP. The GDP is still $1. GDP only counts for new goods.

You can measure GDP across any time frame. Most often though, GDP is measured by year.

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So why is GDP important?

GDP is an indicator of a country’s financial capability. If a country has a high GDP in comparison to other nations, it means the country is generally productive. We should expect to see a better quality of life in that country vs. others, and the the quality/number of goods and services in that country will be high.

GDP doesn’t tell the whole story. A country of 10 million people will almost always have a higher GDP than a country of 1 million, since more people can do more work. That’s why we also often measure ‘GDP per capita’ or GDP divided by the population. A country of 1 million people with a GDP of $2billion is more prosperous than a country of 10 million people with a GDP of $10billion.

Edit: I should mention, the GDP of a given nation (and GDP globally) is usually always increasing. As we invent new technologies or find new ways to be more productive, GDP generally goes up over time. Most economists look at the rate of GDP growth as an indicator.