What is GDP? | CNBC Explains

Summary

GDP, or Gross Domestic Product, is a key indicator of an economy's health, measuring the total value of all goods and services produced within a country. It's calculated by adding consumption, investment, government spending, and net exports. While it's a universal measure, GDP has limitations, such as not accounting for services, digital economy, economic equality, or unpaid work. Alternative measures for overall happiness and quality of life have been proposed but haven't gained traction.

Takeaways

• 📈 GDP stands for Gross Domestic Product and is a key indicator of an economy's health.
• 💷 GDP measures the total value of all goods and services produced within a country.
• 🏙️ In the UK, GDP is approximately £2.5 trillion per year, while the US has the world's largest economy at around $19 trillion annually.
• 🔢 The most common way to calculate GDP is through the equation: consumption + investment + government spending + net exports = GDP.
• 🛍️ Consumption, or consumer spending, often accounts for over half of a country's GDP in developed economies.
• 🏢 Investment measures business spending on assets like buildings, land, and equipment, including residential property.
• 🏦 Government spending includes expenditures on public services like infrastructure, education, and defense.
• 🌍 Net exports are calculated as the value of a country's exports minus its imports.
• 📉 A negative GDP growth over two consecutive quarters is indicative of a recession.
• 🚫 Critics argue that GDP does not fully capture the value of services, digital economy, economic equality, or well-being.
• 🌐 Alternative measures to GDP have been proposed to better reflect overall happiness and quality of life.

Q & A

What is GDP and why is it important?

GDP stands for Gross Domestic Product, which measures the total value of all goods and services in a country. It is important as it serves as a key indicator of the overall health of an economy.

How is the GDP of the United Kingdom calculated?

The GDP of the United Kingdom is calculated by adding up consumption, investment, government spending, and net exports.

What is the approximate GDP of the United States?

The approximate GDP of the United States is around $19 trillion every year.

What does consumption include in the GDP calculation?

Consumption includes the money spent on physical goods like coffee and services like haircuts by consumers.

How significant is consumer spending in developed economies?

In many developed economies like the U.K. or the U.S., consumer spending makes up more than half of a country’s GDP.

What is investment in the context of GDP?

Investment in GDP refers to the money businesses spend on buildings, land, equipment, and major consumer investments like buying a home.

How does government spending contribute to GDP?

Government spending contributes to GDP through the money spent on public goods and services like roads, schools, and defense.

What is the difference between France, the U.K., and the U.S. in terms of government spending as a percentage of GDP?

Government spending as a percentage of GDP is roughly 56% in France, 41% in the U.K., and 38% in the U.S.

What does net exports mean in the GDP calculation?

Net exports in the GDP calculation refer to the value of exports minus the value of imports.

Why might a country have negative net exports?

A country might have negative net exports if it imports more products than it exports.

What does the GDP growth rate indicate about an economy?

The GDP growth rate indicates the percentage change in GDP over time, with positive growth suggesting a healthy economy and negative growth suggesting a struggling economy.

What are the limitations of using GDP as a measure of an economy?

GDP has limitations as it does not account for economic equality, well-being, unpaid work, and does not factor in costs like pollution or illegal activities.

What are some alternative measures to GDP that have been proposed?

Alternative measures to GDP include those that measure overall happiness and quality of life, although none have become as widely adopted as GDP.

Outlines

00:00

📈 Understanding GDP

The paragraph explains how GDP measures the size of an economy. It starts with a real-life example of buying coffee in London and how that transaction contributes to the UK's GDP. GDP is described as a measure of the total value of all goods and services in a country. The UK's GDP is compared to the larger US economy, with figures provided. The calculation of GDP is detailed through the equation: consumption + investment + government spending + net exports = GDP. Each component is broken down: consumption refers to spending on goods and services, investment covers business spending and home purchases, government spending includes public goods and services, and net exports are the difference between exports and imports. The paragraph also touches on GDP growth rate and its implications for economic health, and the concept of recession. It concludes by discussing the limitations of GDP as an economic measure, such as its focus on production over services, lack of consideration for economic equality and well-being, and exclusion of unpaid work and environmental costs.

Keywords

💡GDP

Gross Domestic Product (GDP) is a key economic indicator that measures the total value of all goods and services produced within a country over a specific period. It is a comprehensive measure of a country's economic activity and health. In the video, GDP is used to illustrate the size of economies like the United Kingdom and the United States, with specific figures provided to give a sense of scale.

💡Consumption

Consumption refers to the expenditure by households on goods and services, including everyday purchases like coffee and services such as a haircut. It is a major component of GDP, often accounting for more than half in developed economies. The video uses the example of buying coffee in London to explain how such consumer spending contributes to the UK's GDP.

💡Investment

Investment in the context of GDP calculation refers to the spending by businesses on physical assets like buildings, land, and equipment, as well as residential investment such as buying homes. The video mentions how investment can decrease during economic downturns, as companies may cut back on spending to save money, as evidenced by the drop in domestic business investment during the U.S. financial crisis.

💡Government Spending

Government spending includes the expenditures made by local, state, and national governments on public goods and services such as roads, schools, and defense. The video highlights how this component of GDP can vary significantly between countries, using France, the UK, and the US as examples to show the different percentages of GDP that these countries allocate to government spending.

💡Net Exports

Net exports are calculated as the value of a country's exports minus the value of its imports. A positive net export indicates that a country is selling more to other countries than it is buying. The video uses the UK's coffee imports and exports to illustrate how a country can have negative net exports in certain sectors.

💡GDP Growth Rate

The GDP growth rate is the percentage change in GDP over time, which is an indicator of economic health. If GDP grows, it suggests that the economy is expanding, whereas a contraction in GDP growth can indicate economic decline. The video mentions that two consecutive quarters of negative GDP growth are considered a recession.

💡Recession

A recession is a period of negative economic growth that lasts for two or more consecutive quarters. It is a signal that the economy is in a downturn. The video explains that two quarters of negative GDP growth are referred to as a recession, which is a significant economic event.

💡Critics of GDP

The video acknowledges that critics argue GDP may not fully represent the complexity of an economy. They point out that GDP places a heavy emphasis on production and manufacturing, potentially undervaluing the service and digital economies. The example of Spotify is used to illustrate the difficulty of incorporating digital services into the traditional GDP calculation.

💡Economic Equality

Economic equality refers to the distribution of wealth and income within a society. The video notes that high GDP does not necessarily mean that wealth is evenly distributed; hence, a country could be rich in terms of GDP but have significant income inequality.

💡Unpaid Work

Unpaid work, such as volunteering or childcare, is not included in GDP calculations. The video points out that GDP focuses on market transactions and thus overlooks the economic value of non-market activities, which can be significant contributors to societal well-being.

💡Alternative Measures

The video mentions that some experts have proposed alternative measures to GDP that aim to capture broader aspects of well-being and happiness. These measures attempt to account for factors that traditional GDP calculations do not, such as environmental quality and personal satisfaction.

Highlights

GDP measures the total value of all goods and services in a country.

In the U.K., GDP is around two-and-a-half trillion dollars per year.

In the United States, GDP is around $19 trillion every year.

GDP can be calculated as consumption plus investment plus government spending plus net exports.

Consumption, or consumer spending, often makes up more than half of a country’s GDP.

Investment measures how much businesses spend on buildings, land, and equipment.

Government spending includes local, state, and national government expenditures.

Net exports are calculated as exports minus imports.

Many countries have negative net exports, meaning they import more than they export.

GDP is a universal measurement allowing countries to compare their economies.

GDP growth rate indicates the percentage change in GDP over time.

Two consecutive quarters of negative GDP growth are referred to as a recession.

Critics argue that GDP overemphasizes production and manufacturing at the expense of services and the digital economy.

GDP does not measure economic equality or well-being.

Unpaid work like volunteering and childcare is not included in GDP.

GDP also excludes costs like pollution or illegal activity.

Alternative measures to GDP have been proposed to measure overall happiness and quality of life.

Despite its limitations, GDP remains the primary indicator of a country's economic health.

Transcripts

How do you measure the size of an entire economy?

Let’s say I buy a coffee here in London for £3.

Those £3 are factored into the United Kingdom’s GDP.

And so is this barista’s salary.

And this espresso machine.

In fact, most of what’s around you is part of GDP.

GDP is an important gauge of the overall health of an economy. It stands for:

Simply put, GDP measures the total value of all goods and services in a country.

That means it measures a lot of stuff worth a lot of money.

Here in the U.K., GDP is around two-and-a-half trillion dollars per year.

In the United States, the world’s biggest economy, it's around $19 trillion every year.

How do you get to these numbers?

Well, you can calculate GDP in a few different ways, but the most commonly used equation goes like this:

consumption plus investment plus government spending plus net exports equals GDP.

Let’s break that down.

Consumption is another way of saying consumer spending.

It’s the money you or I spend on physical goods, like coffee, and on services, like a haircut.

In many developed economies like the U.K. or the U.S.,

consumer spending makes up more than half of a country’s GDP.

The second part of the GDP equation is investment.

This measures how much businesses spend on things like buildings, land and equipment.

It also includes a major consumer investment - buying a home.

Investment can take a hit when the economy is suffering.

You can see that in this chart domestic business investment

plummeted in the U.S. during the financial crisis.

That’s because companies were trying to save money instead of

putting it toward things like factories, machinery and equipment.

Okay, now we get to government spending.

This is the money local, state and national governments spend on things like roads, schools and defense.

Government spending varies a lot depending on each country’s approach to public goods and services.

Take for example France, where government spending amounts to roughly 56% of GDP.

That’s compared to 41% in the U.K. and 38% in the U.S.

That brings us to the final part of the GDP calculation: net exports, or exports minus imports.

A lot of countries have negative net exports, meaning they bring in more products than they send out.

For example, the U.K. imports around $1 billion worth of coffee every year

but only exports around $315 million, meaning its net exports of coffee are negative.

Countries around the world collect data on consumption, investment, government spending and net exports.

This makes GDP a universal measurement and a way for countries to stack up against one another.

But it’s not just the sum of the equation people look at.

You'll often hear about the GDP growth rate, or the percentage change in GDP over time.

Generally, if an economy is healthy, GDP growth expands.

If an economy is in bad shape, GDP growth contracts.

Two consecutive quarters of negative GDP growth are referred to as a recession.

But GDP doesn’t always give a full picture of the economy.

Critics say the equation puts too much weight on production and manufacturing,

and not enough on services and the digital economy.

Just think of Spotify. For $10 a month you can listen to unlimited music from a huge range of artists.

In the past, you would have had to buy all of those albums separately, with each one contributing to GDP.

It’s hard to factor a digital service like Spotify into the GDP equation

which is used to measuring physical goods.

GDP also doesn’t measure economic equality and well-being.

So even if a country is really rich according to GDP, wealth may be spread unevenly.

Plus, GDP excludes unpaid work like volunteering for charity or child care.

And it doesn't factor in costs like pollution or illegal activity.

Some experts have come up with alternative measures to GDP

that measure overall happiness and quality of life.

But so far, none of these have stuck.

Maybe it’s just too hard to put an economic value on that first sip of morning joe.

Hey everyone, Elizabeth here. Thanks so much for watching our video.

Be sure to check out more of your CNBC Explains over here.

And leave us any other ideas in the comments section.

Talk to you later!