Gross domestic product

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Gross Domestic Product or GDP is a measure of the total economic activity of a territory, including all private and public consumption, government expenditure, investment, product inventories, and net exports that occur within that defined territory.[1] GDP is generally calculated on an annual basis and can be used as an indicator of the economic health of a country, as well as potentially being able to quantify a country's standard of living.

Closely linked to the concept of GDP is GNP, or Gross National Product. The main difference between the two economic measures is that GDP is an estimated value of the total worth of a country's production and services and is used to determine the strength of the local economy while GNP is the estimated value of the total worth of production and services by citizens of a country, on its land or on foreign land. As well, GNP is used more to see how citizens of a country are faring economically.[2] This slight difference often makes GNP a better indicator of quality of life than GDP.

Both GDP and GNP tend to go up as a country uses more energy.

GDP and Quality of Life

The simplest model shows that GDP and quality of life correspond to a degree; a higher quality of life can lead to more personal wealth. A higher income often leads to more comfortable living conditions, some extra income for personal purchases, better education, or better healthcare. As well, a higher GDP can indicate more development across a country and indicate better social services for citizens. Overall, the growth of stock markets and banking systems increase growth overall, which is a major factor in poverty reduction. Since GDP is a measure of stock market size, GDP can be connected to the reduction of poverty in countries.[3]

However, the correlation between GDP and quality of life is not direct. GDP may not tell an accurate story about the overall quality of life as it does not include any social indicators such as levels of education, amount of free time, or personal fulfillment. GDP was created to measure growth in terms of the expansion of the output of goods and services, and was not created with social aspects in mind.[4] Generally, critics agree that GDP is not intended to gauge material well-being of a country or its people, but rather it was meant to serve as a measure of a nation's productivity.[4] As well, the way in which production is defined can skew how accurate GDP is. For example, many measures of GDP do not include work done out of the home, or the "underground" economy. In many lower-income countries, this type of production may be more common.[4] This reduces GDP's usefulness because GDP no does not provide an accurate representation of how many people are self employed and making a small living out of their own home. It also does not show how well workers are being treated, which contributes significantly to quality of life.

Most economists agree that a more accurate representation of quality of life is the human development index, as it takes into account components of a persons well-being that are important to a good overall quality of life but are not limited to economic indicators.[5]

GDP and Energy Use

Energy production and use play an important role in the economy both in supply and demand, GDP and energy use can often correlate.[6] Generally speaking, countries with higher GDPs have gone through some form of industrialization, and thus a large amount of their energy consumption goes towards production of goods. As well, countries that boast a higher GDP are likely also more populated (the prime examples being India, China, and the US) which also corresponds to more energy use in that country.

The main question that is posed is whether or not it is a higher GDP that promotes higher levels of energy use or vice versa. If energy consumption causes an increase in GDP this implies that economies are energy dependent, and thus energy use is required to stimulate growth. This would indicate that energy shortages would potentially cause poor economic performance, causing drops in income and employment rates. However, if it is the other way around then the economy is not energy dependent, and energy conservation policies may be implemented without negative effects on growth and employment. It is important to understand if one causes the other and in which direction the causality acts in order to predict how ecological policies will affect the economy.[6]

As well, there is a specific economic and environmental indicator that compares GDP to energy use explicitly. Energy intensity is the ratio of energy use to GDP, used to analyze and compare energy efficiency of economies and individual fuel sources.[7]

For more information on the connection between GDP and energy usage, see the World Bank's data set.

Criticisms

Critics of GDP are skeptical of how well GDP can be used as anything beyond an economic indicator. These critics claim that some sources attempt to use GDP as a social indicator when better methods may exist. These concerns are legitimate since GDP represents only the perceived economic strengths of a country and may ignore the quality of life of the workers in that country. Critics also point out that GDP fails to include economic activity from cleaning up oil spills, repairing damage from natural disasters, and the building of prisons - all of which amount to a higher GDP but correspond negatively to well-being.[5]

Economically, critics of using GDP as an economic measure say that this guideline does not take into account any transactions that are not reported to the government, and therefore might not give the whole picture.[4]

GDP in different countries

Below is an interactive graph that allows you to compare and contrast the GDPs of countries around the world with data taken from the World Bank.

References

  1. "A Dictionary of Economics" published Oxford University Press, 2013. Edited by John Black, Nigar Hashimzade, and Gareth Myles Online version accessed [August 17th, 2017].
  2. Diffen. (April 4, 2015). GNP vs. GDP [Online]. Available: http://www.diffen.com/difference/GDP_vs_GNP
  3. World Bank. (May 4, 2015). 2014 World Development Indicators [Online]. Available: http://data.worldbank.org/sites/default/files/wdi-2014-book.pdf
  4. 4.0 4.1 4.2 4.3 OECD Observer. (May 4, 2015). Is GDP a satisfactory measure of growth? [Online]. Available: http://www.oecdobserver.org/news/archivestory.php/aid/1518/Is_GDP_a_satisfactory_measure_of_growth_.html
  5. 5.0 5.1 Richard Wolfson. (April 4, 2015). Energy, Environment, and Climate, 2nd Edition. W.W. Norton & Company.
  6. 6.0 6.1 Jaruwan Chontanawat, Lester C. Hunt, Richard Pierse. (April 4, 2015). Causality between Energy Consumption and GDP: Evidence from 30 OECD and 78 Non-OECD Countries [Online]. Available: http://www.seec.surrey.ac.uk/research/SEEDS/SEEDS113.pdf
  7. US Energy Information Administration. (April 4, 2015). Energy Intensity [Online]. Available: http://www.eia.gov/forecasts/aeo/er/early_intensity.cfm

Authors and Editors

Lyndon G., Jordan Hanania, Ellen Lloyd, Kailyn Stenhouse, Jasdeep Toor, Jason Donev
Last updated: June 25, 2018
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