Some thoughts on GDP

22 August 2020

World economies by GDP (nominal) in USD / Ali Zifan / CC0

I was asked a question: "Would I be right in saying GDP is not always a good indicator of an economy?"

My response: "GDP is an important piece of a larger puzzle which should never be looked at in isolation."

Here's a brief explainer:

GDP (gross domestic product) is the value of services provided and goods produced in a year.

There are two major methods of calculation to determine GDP: one is called "purchasing power parity (PPP)" and the other is called "official exchange rate" or "nominal".

"Nominal" GDP calculates the value of a country's goods and services in US dollars and compares that figure with other countries. Because this is based on exchange rates, a country can go higher or lower from one year to the next.

South Africa's GDP (nominal) for 2017 was $349.3 billion.

Compare this with Apple's *profit* for 2017 of $229.23 billion

PPP GDP takes into account the cost of living in a country. Example: A KFC franchise in South Africa produces less revenue in dollar terms than one in New York, but they both produce and sell similar quantities of chicken with similar profit margins. 

(As an aside, check out "burgernomics" which operates on a similar principle)

For citizens, absolute GDP is less important than the ratio of GDP to population — GDP per capita.

Our 2017 PPP GDP per capita was $13 600. India's PPP GDP 2017 was $9 474 billion but PPP per capita was $7 200

GDP growth is, to my mind, the important measure of an economy. My rule is simple: If GDP growth exceeds the growth in population, the country becomes more prosperous. Reason: every year, there is more money per citizen.

India's population growth rate for 2017 was 1%. India's GDP growth rate for 2017 was 6.7%.
South Africa's population growth rate for 2017 was 1,4%. South Africa's GDP growth rate for 2017 was 1.3%
India got richer; South Africa got poorer.

Summary: Absolute GDP is less important than the ratio of GDP growth to population growth.

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