How do you measure GDP?
- Value added ( förädlingsvärdeSwedish ) = The difference between the sale price and the production cost of a product.
- Main industry ( huvudnäringSwedish ) = Primary ways to earn money.
Many of the ideas behind the GDP were developed by the late Simon Kuznets of Harvard University. He won the Nobel Prize in economics in 1971 for this work. - ( page 28 )
3 different GDPs
There are 3 different ways to think about and measure GDP.
- Measure spending on goods and services by different groups. Households, businesses, government and foreigners.
- Measure production in different industries. Agriculture, mining, manufacturing, and so on.
- Measure the total wage and profit income earned by different groups producing GDP.
Each of these measures has its special purpose, but they all add up to the same thing. - ( page 28 )
Measuring GDP through spending
At beginners macroeconomics class the teacher only used the spending one for the IS-LM diagrams,
so this is the only one I'm familiar with.
Y = C + I + G + X
- Y = GDP ( Gross Domestic Product )
- C = Consumption ( ~55% )
- I = Investment
- G = Government spending
- X = Net exports ( exports - imports )
GDP and welfare
In the economic context higher income, that is higher GDP usually gets simplified like it's synonymous with increased welfare. This is not entirely accurate when:
- GDP/capita doesn't say anything about how income are allocated.
- GDP does not show any consideration to the natural environment.
Example: Assume 2 countries A and B, where B has an industry that pollutes the natural environment to a greater extent than A.
|Country A||Country B|
|Value added main industry||1000||1000|
|Value added environmental decontamination||100||300|
Country B has higher GDP but worse public health and natural environment.