GDP Figures as a Means of Comparing Countries

Updated on November 4, 2016

GDP per Nation

Source

Facts and Figures about GDP

  • Developed in the USA in 1934
  • GDP = private consumption + gross investment + government spending + (exports − imports)
  • Green GDP = cost of environmental damage
  • GDP - subject to Macroeconomics
  • GDP per Capita = standard of living (in theory)

Gross Domestic Product

GDP is estimated by calculating the sum of consumption, investment, government spending and exports, minus the imports. While the total economic activity is often reliably measured using GDP, such a complex estimate is subject to various limitations, which may affect its reliability as a basis for comparison between countries, especially where a large void in between is present.

GDP per Capita is frequently more trustworthy that GDP itself. GDP per capita consists of all Gross National Product divided by the population of the country in question. If a nation has a higher GDP per capita, then its people are generally wealthier and enjoy a higher standard of living, than those in a country with low GDP per capita. Although often accurate, GDP per capita also encompasses some limitations. A large amount of economic activity may not be recorded, such as informal or black markets. This creates a large gap between undeveloped/developing nations, where much currency flows through illegal trade, and developed countries, where almost all-economic activity is taken into account.

It is also essential to differentiate between Nominal and Real GDP. This is important to be able to reliably compare not between different countries, but between time frames of one nation’s economy. If a single country’s GDP was compared with that of the previous year for the same country, then one could observe that prices have risen. If prices have risen, this constitutes inflation, which exaggerates the GDP. As a result GDP rises, although economic activity and growth remain unchanged. This limitation is solved by taken inflation into account. Real GDP is received by adjusting the Nominal GDP for inflation. Nominal GDP constitutes the value at current prices. This deletes any mistakes that have occurred due to changes in price over time.

Another factor, which may be utilized to compare countries, is their GNI or Gross National Income. GNI is efficient as a basis for comparison as it shows the GDP, which is internally produced, i.e. it excludes income from abroad. From GNI another factor, which gives a more realistic view of the economic activity of a nation, may be acquired – NNI or Net National Income. NNI is equal to GNI minus depreciation. Depreciation, also known as capital consumption, consists of several things. These may be overuse or damage of machinery, or the fact that technological advances make specific machines obsolete. However it is very difficult to calculate, as a concrete value of depreciation is almost impossible to obtain. Thus, NNI is rarely used.

In conclusion, GDP is used in various ways to compare either to nations, or a country with itself at another point in time. Despite several limitation, which may create inaccuracies and unreliability, Gross Domestic Product is widely used the single measurement of comparison of economic activity, growth, development and advancement, but care must be taken during calculations and assessment in order to minimize error, which might negatively affect the efficiency of such a comparison.

The USA's GDP

Source

GDP per Capita or Real GDP

Which is better as a base for comparison between nations?

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GDP per Capita

Gross Domestic Product per Capita is the GDP of a nation divided by the population. This is frequently used to measure the living standard of the people in the country - The higher the GDP per Capita, the higher the living standard, because the population of that country consumes more, spends more and invests more. All these actions rise GDP, which in turn rises the GDP per Capita and thus closing the great circle of capitalism. - In order for the people to have more money, they must spend more, so the economy may grow, that paradoxical cycle actually works and is the beauty of Capitalism. GDP per Capita may be even better than simple GDP to compare countries.

GDP growth

Source

GDP by Welker Economics

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