What is GDP? The Gross Domestic Product (GDP) refers to all services and products produced in a nation. Therefore, it is the sum of all final goods and services; its value is calculated in local currency.
This indicator is mainly used to compare the economic performance between countries or the evolution of a country year after year or even in different quarters. So, what makes GDP grow?
What makes GDP grow?
Despite the fact that people’s lives depend on many other things besides GDP growth, this indicator is fundamental for economic and social policies to be worked on and provide a better life for the population. This is because a growing GDP offers more chances for economic and social development.
One of the most influential factors for a GDP to grow is household consumption. That is why GDP is such an important indicator. With the population buying more, companies need to invest to meet the growth in demand and increase their profits. This raises the GDP.
In a situation like this, when the economy heats up, the government tends to receive more taxes and expand its operations through state-owned companies. Investments in education, labor, and technology also feed this cycle and help make companies more competitive. Thus, they sell more products to other countries. When a country’s exports are greater than its imports, the balance of trade becomes favorable and the GDP grows.
Given this scenario, an increase in the number of jobs and people’s salaries are expected. All of this is not as simple as it may seem. It is also not protected from setbacks, such as inflationary pressures, which could compromise this positive spiral, increasing prices, reducing consumption, and reducing economic growth. The balance between economic growth and crisis can be quite delicate.
What are the causes of fluctuations in GDP?
Cyclical fluctuations in GDP, i.e., fluctuations in the utilization of production capacities over a period of around three to six years, are due to changes in demand and the associated fluctuations in production. Therefore, a distinction must be made between domestic demand changes and demand from abroad.
Fluctuations in domestic demand can occur in all final demand categories – private consumption, government consumption, and investments. Private consumption is primarily influenced by the development of wages and salaries and – to a limited extent – also by households’ propensity to save or consume. In addition, the change in prices also determines the “real” demand of households. For the development of the price-adjusted GDP based on production, the “real” demand, i.e., the quantity adjusted for the price development, is decisive.
The state can also influence the economy through its demand. In times of an economic downturn (recession), it can, for example, help to dampen the downturn by stabilizing its expenses. The investments – construction, and equipment investments – are influenced by a variety of factors. The expected return on the invested capital is of great importance. This is decisively determined by expectations about future business development and the utilization of production capacities. If the expected return on tangible assets is higher than cash investments, the capital is preferably invested in tangible assets.
GDP per capita: What is it for?
GDP per capita is an indicator of the economic output of a country, accounting for the number of its inhabitants. It is calculated by multiplying the country’s total population by its gross domestic product. This gives a per-capita (per-person) estimate of the country’s economic output.
It’s often used to indicate a country’s standard of living and economic well-being. However, it can also provide insight into the distribution of wealth within the country.
Why are GDP and GDP per capita not enough to show the whole reality of the economy?
A country may have a very large GDP or a GDP per capita. Still, because this production is concentrated in a small part of the population, most people’s economic and social situation is not good.
There are countries, however, that have a more moderate GDP and GDP per capita and are not among the largest economies in the world but manage to offer a better quality of life for their inhabitants. For this reason, the Gross Domestic Product and its sub-index are not enough to portray a nation’s socioeconomic situation alone.
