How GDP measures economic growth

One of the most accurate ways of measuring the performance of a country’s economy is by calculating the GDP. GDP stands for gross domestic product. It might be a term you have heard several times but don’t know what it means. GDP is a figure that has been used for decades. Today we will explain what it is and how countries use it to measure growth effectively.

What Is GDP?

Firstly, it is important to distinguish what Gross Domestic Product encapsulates. Defining what is GDP can focus on several factors. Many countries that use this measurement will often compile further figures to ensure that any initial report is accurate. This is because there are so many different variables to measure.

Simply put, GDP evaluates the value of the total goods and services that a specific country has produced over a specified period. The most common timescale is a calendar year. GDP measures the entirety of the output generated in the country within that period and uses it as a barometer to calculate how they measure up compared to other economies.

What Is Economic Growth?

There’s a wide scope of what economists consider effective measuring tools to quantify economic growth over a certain period.

Economic growth is a country's annual gain through the total of goods and services produced and sold. The rate is adjusted for inflation, and the information is usually released at the end of the year. It is detailed as a percentage figure and generally referred to as either GDP or real GDP.

One example of strong economic growth has been through the 90s and early 2000s when China became the workshop of the world. Regularly posting figures of 10% GDP growth per year (anything over 3% is considered reasonable), they turned from a promising emerging economy to one of the true superpowers on the global economic stage.

At the moment, the country with the highest expected growth figures is Guyana. After a huge oil discovery, the minnow nation has gone from a small, modest country to the top of expected GDP growth for the next 5 years. Analysts and economists predict their GDP growth to exceed 50% for at least the next few years. The discovery of billions of barrels of oil has brought excitement and caution and could completely transform the country over the next decade.

Oil discoveries can bring problems, including political and social instability and corruption. However, Guyana is one of the poorest regions in South America. If the government put the money back into health and education like they said it would, the country could see the biggest change they have ever witnessed.

Are There Different Types Of GDP?

There are a couple of ways in which countries will release GDP figures. GDP is either considered nominal or real term. As discussed earlier in the article, GDP is measured when the total combined value of goods and services is compiled. Nominal GDP reflects only the value of goods and services and does not measure inflation.

The real-term GDP figure is the most accurate assessment. If a country releases figures that they have had 10% GDP growth but have also had a 10% rise in inflation, in real terms, the GDP hasn’t increased in that fiscal year.

If a country posts negative GDP or is accused of tampering with the figures to give off the impression it is growing, these are very bad signs for an economy. It shows that infrastructure is poor, production is low, and the quality of the currency and the ability to produce goods are extremely limited. This leads to a lack of investment, poverty, and a weakened currency.

Conclusion

GDP will likely be used to measure economic growth for a long time. Despite the fact other measurements have been attempted, most economists and analysts agree that real GDP figures are the best way to measure the output of an economy. It is a tried and tested method and has been used for decades as an effective tool to measure what countries should be considered the main economic superpowers and the countries lower down the chain.

However, some criticism has been leveled regarding including certain services, such as financial services. As they are not considered tangible goods, some countries have been accused of using them to increase GDP figures in affluent economies. However, these companies pay billions of dollars in tax and fuel business development, so the vast majority of analysts and economists agree that it is fair to include them.

(Disclaimer: Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)