The Gross Domestic Product of a country. What does it mean, how is it calculated and is it important? I’ve never really gotten it
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For most of human history, we kind of thought that how rich a country was depended on how much money it has. That kinda makes sense, rich people have the most money so rich countries must have the most money. However, our thinking about this began to change in the 1700s.
Countries like Spain began bringing in enormous amounts of silver from the New World. Back then, most currency was made of silver (and other precious metals), so they had by far the most money. Despite all of this, Spain continually lost power and influence to two upstart countries: the Netherlands and England. These countries did not have access to precious metal on anything like the same scale as Spain, but were able to support larger navies, feed their population, and develop advanced technologies. People began to question the old notion of what makes a nation wealthy.
A Scotsman named Adam Smith wrote a book entitled ‘The Wealth of Nations’ and among many groundbreaking ideas, he argued that wealth goes beyond money and is actually all of the output of an economy (everything produced domestically), minus the inputs (things imported from abroad). When you turn wheat into bread, the wheat has become more valuable and you have become more wealthy, and on and on for everything in the economy. This is what GDP seeks to measure, all of the value created by production in the economy.
GDP just one measure, but it is very highly correlated with things that matter. Countries with higher GDP per person tend to have better schools and universities, lower infant mortality, longer lifespans, and higher overall happiness. Lots of other factors like inequality, political instability, etc. can play into it, but GDP is almost always the best starting point for any economic analysis.
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