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ECON 3b GROSS DOMESTIC PRODUCT

I reserve the right to be wrong.



Microeconomics is the study of markets and their participants, and macroeconomics is the study of whole economies. This means we need tools to analyse what is going on at a national level. The most widely accepted areas of macroeconomics are the study of money, of business cycles and of national economic performance using the metric called gross domestic product or GDP.

When we want to measure the size of an economy we empirically measure the value of a subset of transactions in every industry ( with the industry definitions being agreed between those doing the measuring beforehand ) then add 'em all up!



GROSS DOMESTIC PRODUCT / Y

We divide transactions into five distinct types; consumption, investment, government spending, exports and imports. The totals of these categories are tallied separately. Finally, the gross domestic product of an economy is equal to total Investment + total Consumption + total Government spending + total Exports minus Imports; or

Y = I + C + G + (Ex-Im)

Isn't that just super? You can also express the last bit as 'Net Exports' or 'NX' if you prefer the added brevity, but you get Net Exports by subtracting the value of imports from the value of exports, expressed in whatever currency you're using, usually Dollars, Euros or Pounds. The shortened version ergo looks like;

Y = I + C + G + NX

Why is this useful? Well, it's a way of calculating how much economic activity is taking place within a territory over a certain period of time. There are a few catches, of course. It's unavoidable. It counts government spending, and it abstracts away the time aspect of the activities being recorded, simply telling you a certain Dollar/Pound value of activity took place within the given time-frame. Usually that time-frame is a year.



USES

GDP is used to measure an economy's performance, so it's the method used to figure out whether life is good or bad. But placing GDP figures for subsequent years next to each other one can check whether the total is getting bigger each year and by how much. At the most basic level, the faster GDP grows from year to year, the better! Moderating factors in the face of this include the business cycle of boom and bust.

Changes in GDP figures over time are used to divine whether an economy is doing well or badly, and is the generally accepted metric in politics or the media for telling the public how well or badly life is going. It'll also tend to be the main reason a political party either keeps or loses power come election day.



PITFALLS

As mentioned above, GDP is a snapshot and an aggregate. You get one monolithic picture for a year and of all the activity in that year.

GDP cannot be perfectly calculated since it cannot be entirely collated from data at source. That is to say, data is gathered from select sources (this is why all the agencies measuring GDP end up publishing different figures from each other) and has to be averaged since not every transaction can be included. This is the knowledge problem getting in the way of economic positivism.



So there you have it, the beauty that is the beast! Wanna rely on it to tell whether or not you're well off? If so, follow this link, and if not, go here instead.



On the next Ecomony Blogtime;

Matt sinks his teeth into the rich gateau of ad hominem argument fallacies.

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