This is my first blog on macroeconomics. It's a new topic that I've gotten into, and I intend to slowly build up my understanding of the subject and keep you non-existent readers updated.
As of now, I see macroeconomics as the prerequisite to understanding policy changes and their implications on the population and subsequent businesses. Economics is not a real science. It's a collection of conjectures on how specific actions cause reactions. To measure reactions, the subject has multiple factors that can be calculated and correlated with corresponding actions. The GDP, social inequality, CPI, GDP per capita, HDI, and so on are examples of such macroeconomic factors.
Today, I'll discuss the most basic of these factors: GDP.
Gross Domestic Product is the sum of a country's final goods and services. Let's highlight some key points here.
The goods and services are final. For example, if a baker buys ten eggs, uses six to make a cake and sells the cake and the remaining four eggs to a customer who eats them. Then, the GDP will account for one cake and four eggs. Note that the cake price will account for the six eggs since the baker would profitably price their cake. As such, by summing just the final products, we've also included all the intermediaries involved that made it possible for the baker to buy the eggs in the first place.
It's the country's goods and services. Let's imagine a situation where the eggs were imported. If we continue with our previous formula, the number we get would imply that the eggs were produced by our home country, which isn't the case. However, the country produced the services that brought the eggs from the port to the baker's grocery store; therefore, that value must remain included. All imported goods and services must be subtracted from the GDP.
If the country exports eggs, it wouldn't matter if the recipient makes a cake or an omelette. The GDP of the country will account for just the eggs.
Taking all this into account, we get a basic framework.
GDP = C + I + G + (Ex - Im)
C --> Consumer Spending
I --> Business investments
G --> Government Spending
Ex - Im --> Net exports (Exports - Imports)
Perfect, we've defined our first-ever macroeconomic factor.
Let's look into ways in which it's measured.
Each country has a national statistics bureau that takes up the task of acquiring and crunching the data to arrive at the GDP. They consider how much the end consumers have spent (the expenditure approach) or how much goods/services are produced (the production approach). The merits of the other compensate for the demerits of each; as such, both methods are used to calculate the final figure.
Interestingly, this gives us an idea of what is accounted for and what isn't. Housework, for example, is not part of the GDP, but hiring a maid will be accounted for. From a macro scale, this makes sense as the higher number reflects more employment or economic productivity. Economically speaking, washing machines had a more significant impact on GDPs than the internet since washing machines made it possible for women (traditional gender roles, I'm sorry) to join the workforce.
Great, we now know what a GDP is and how it is measured. Let's determine how to use it to create opinions about a country's performance.
Let's say the GDP of country A was 10 trillion USD in 2015, and that of 2025 will be 15 trillion. What opinions can we form?
Right off the bat, we can see that the GDP has grown by around 4% per annum.
We can use this number to compare our growth with other countries. We can also estimate that every major industry in our country A has grown at that rate.
But what does this mean for an individual? Does this mean that their wages are increasing by 4%? It could, but what if the company hires 4% more people yearly? That would mean that the wages are stagnant.
What if the currency's value due to inflation has decreased by 4% annually? This would mean that the wages have increased, but it's an empty figure that doesn't reflect any change in their lifestyle.
We make an important observation here. The GDP increases with population, and since it is measured in USD or some currency, the value of the currency influences the meaning of GDP.
Time to make a distinction. Nominal GDP is what we've discussed till now, and often, GDP means nominal GDP. Real GDP is when you fix the currency value and calculate two GDPs. This eliminates the influence of inflation in our comparison. Now, the real GDP growth reflects the proper development of the nation, which is devoid of fluctuations in its currency.
So, the real GDP growth per annum gives a more nuanced picture of how much the country has developed. And this is what is used to compare a country at two different points in time.
Great, we've got a way to eliminate currency value. What to do about the population.
Simple, just divide.
GDP per capita reflects the average economic production per individual.
This is an average. Social inequality, happiness, corruption, etc., aren't reflected in a GDP but are essential in macroeconomics.
It gives a sense of the standard of living over the years but not the full picture. We can't compare GDP per capita with different countries and make a comment on the standard of living. Comparing two countries with nominal GDP gives a sense of where we're ranked on the global stage, but that's pretty much it. In the next blog, we'll dive into how GDP can be used to compare the living standards in two countries. For now, we've defined GDP, understood how it's measured, and discussed how to adjust GDP to make opinions on how a country has progressed over time.
Until next time :)
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