What the Heck is GDP?

GDP, GNP – what does it all mean? Jonathan explains what economists mean when they bring up these common economic indicators.

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Episode Transcript

Speaker 1 (00:02):
Welcome to brain Stuff from How Stuff Works. Hey, brain Stuff,
it's Christian Seger. Okay, let's say you've just gotten a job.
Offer to work in the majestic country of bum Sylvania. Awesome, right,
You've always wanted to live amongst the scenic bum Sylvanian
swamp lands, and here the local ghost toads sing their

(00:22):
famous mating screech. But before you pony up the five
forty nine cents for Rosetta Stone bump Sylvanian Edition, you
want to do a little research on the economic health
of this country. So you ask your friend, the economics professor, Hey,
how is the economy of bum Sylvania doing these days? Well,
one number that will almost definitely figure into her reply

(00:45):
is the country's g d P. This stands for gross
domestic product. G d P is a common measure that's
used to roughly represent the size of a country's economy.
The way you calculate g d P is both simple
as a general principle and complicated in the details. The
simple version is that GDP is the value of all

(01:07):
the goods and services produced within a country in a
given period of time, such as a financial quarter or
a year. So if we look at bum Sylvania, we
can calculate its yearly GDP by adding up the dollar
value of all the stuff it creates, all the pork sandwiches,
shoe shines, fashion magazines, bullets, massages, motorcycles, jiu jitsu classes,

(01:33):
ghost toad swamp tours, and of course, traditional Bumpsylvanian style
wooden hats. Every item, product, or service brought to market
by workers or other economic resources located inside the country
in that year is part of the g d P.
Of course, coming up with this figure is not as
easy as it sounds. GDP is actually a highly complex

(01:58):
and abstract statistical instrument that takes some real work to calculate.
Just one example of the many complications. Let's say somebody
cuts down some swamp trees and turns those trees into lumber,
and then sells that lumber to a haberdasher who turns
it into a traditional bump Sylvanian style wooden hat. Do

(02:18):
you count the sales of both the lumber and the hat? Well, no,
because g d P is a measure of the final
value of goods and services. So if you counted the
sale of the wood to the hat maker and the
sale of the hat, you'd be counting the same value
twice the value of the wood gets wrapped into the

(02:39):
final value of that gorgeous, gorgeous head CEAR. G d
P is probably the most important measure of the size
and performance of an economy, but it's not the only one.
There's also g n P, which is related but slightly different.
G n P stands for gross national product. G d

(02:59):
P is the value of all economic production inside a
country's borders, no matter who is doing that production. G
n P, on the other hand, is the value of
all the products and services produced by a country's residence,
even if production takes place outside the country. So if

(03:20):
a bump Sylvanian business has a factory making wooden hats
in another country, the output of that factory would be
included in bump Sylvania's g n P, but not it's
g d P. Both figures are economically useful, but according
to the U S Bureau of Economic Analysis, g d
P is the primary measure used by the United States

(03:43):
and most other countries. While g d P is a
widely used indicator of economic strength, many critics point out
that it's not necessarily the best indicator of the real
health of a nation. For example, a country with a
large growing g d P might look strong on paper,
but what if that number is masking vast income inequality

(04:07):
a productive economy based on huge amounts of, say, low
wage labor. Of course, by comparing g d P with
other pieces of data, you can do more with the figure.
A simple example would be comparing g d P with
population to come up with per capita GDP, which means
economic value per person. So, for example, according to the

(04:29):
World Bank in tween, China's GDP was a massive nine
point two trillion dollars. Compare that to Luxembourg's relatively small
g d P of sixty billion dollars. Yet in the
same year, China's GDP per capita was only about six thousand,

(04:50):
eight hundred dollars, while Luxembourg's was more than sixteen times
that at about one hundred and ten thousand dollars. So,
while China's a economy is certainly much larger, it looks
like each individual citizen on average is better off in Luxembourg.
Financially speaking. Methods check out the brain stuff channel on YouTube,

(05:17):
and for more on this and thousands of other topics,
visit how stuff works dot com.