What is GDP?

​Economic development is about the nation's efforts to ensure political, social and especially economic well-being for its people. What hides behind these vast categories? Creating/retaining jobs, adoption of new technologies, effective tax base system and moving from agriculture-based to industry-based economy just to name the few. It should not however be used interchangeably with the notion of industrial development which is a more narrow areas and will be discussed later on. Economic development is closely linked to environmental issues as the economic growth largely depends on natural resources especially fossils such as carbon, oil and gas. The world has started to think about economic development in 1945 during post-war period of reconstruction. It was then when nations began to realize, reflect on and strive for social, political and economic stability which together they saw as a single key for success and prosperity.

Right next to growth of inflation, unemployment and interest rates, GDP is one of the key measures to gauge economic development. It can be seen as a simple, but not single, measure of the material wealth produced by an economy. Another one is a purchasing power and you can read about it here. 

GDP indicates the total productions taking place within the geographic boundaries of any given country in a single year. 

What is excluded from the above quotation is the deprecation of a capital (-> this would give us net domestic product), illegal sales of goods services (black market), sales of used good, intermediate sales (used to produce final goods), transfer payments made by government and sales of goods that were produced outside domestic borders. 

Just to recap GDP: 

• Shows how much economic activity takes place within given country.
• Indicates the market value of all produced goods and services.
• Provides basic measure of the material wealth created solely by an economy.

The latter point reminds us that by 'product' or 'production' we do not mean buildings, landscapes, infrastructure etc. that may add up to the overall quality of life but rather the actual money flow from household to firms in exchange for goods and services in a given time period. Usually it is a year but if we are interested in measuring the dynamics of production or unemployment it could even be a quarter. In general, we are interested in getting a sense of the standard of living of a country. In order to do that we take the total production in the country over a given time period and divide it by the population, which gives us the gross domestic product per person (per capita). Why do we calculate it this way?

Larger countries produce more, because there are more people and therefore more workers, so if we simply were to compare countries in terms of the total production, we would find that indeed these countries would have higher production rates and hence GDP but we wouldn't learn a lot about each person's average contribution to the economic performance. And therefore it would be harder to estimate the average living standards and financial wellbeing of each person in a given country. 

We need to remember that GDP per capita is not a measure of personal income nor does it take into consideration the income distribution across the country!

The World Bank keeps very systematic records on gross domestic product per person, and it classifies countries into three categories. These are: 

• High income countries (>$12,000 per person per year)
• Middle income countries ($1,000-$12,000 per person per year)

                 Upper middle income
​                      Diving line of around $4,000 per person
                    Lower middle income 

• Low income countries (>$1,000 per person per year)​

​There is roughly 1 billion people living in high-income countries, 5 billions in middle income countries (further divided into 2.5/2.5) and 1 billion in low income countries which as we can see are heavily concentrated in tropical Africa and in south Asia. 

United Nations 4th Category

There is a subgroup within the low-income countries that not only lives in extreme poverty but the human conditions of disease, education levels and social and political instability are very bad. What is more these countries are at the greatest risk of both natural disasters such as droughts or floods as well as conflict and violence. Because these countries are highly vulnerable, the UN has classified them as the least developed countries. There are about 50 of them mostly located in tropical Africa. Other countries include Afghanistan, Nepal, Bhutan and Laos. Please note that these are all landlocked countries. It is not a coincidence. As we know economic development relies on the international trade, which in turn requires access to the sea and effective transportation systems. We will discuss the geographical determinants of nation's development in the next posts. 

Summarizing, GDP is a good measurement if we want to know the overall condition of a country and its level of economic development. It for sure is a good starting point for cross-country comparisons but for a more comprehensive understanding we would need to include other indicators of social well-being such as education, healthcare etc. We will also learn the different ways to measure the above including GINI Coefficient and Human Development Index in the following blog posts.