📹 Real GDP Per Capita and the Standard of Living
GDP per capita, while useful, is not a perfect measure. For example: GDP per capita is roughly the same in Nigeria, Pakistan, and …
What does GDP per capita not show?
GDP per capita is a crucial economic indicator used for cross-country comparisons of living standards and economic well-being. However, it is not a measure of personal income and has limitations such as not considering income distribution and being distorted by exchange rate fluctuations. Despite these limitations, GDP per capita data is valuable for businesses considering international expansion or investment. Higher GDP per capita often signifies a more affluent market, making it an attractive destination for investments in sectors like luxury goods or high-end services.
Additionally, markets with increasing GDP per capita can be ripe business opportunities to capitalize on. Overall, GDP per capita data is a valuable tool for businesses to understand and adapt to their global market.
Why is GDP per capita not a good measure of standard of living?
GDP is a broad indicator of a society’s standard of living. However, it does not account for a number of other factors that can directly impact a society’s standard of living, including leisure, environmental quality, health, education, market activities, income inequality, variety, technology, and other factors.
How does per capita GDP relate to the quality of life?
GDP per capita is the economic output of a nation per person, used to measure a nation’s prosperity, while per capita income is the amount earned per person, used to determine a population’s standard of living and quality of life. Burundi, South Sudan, and Malawi have the lowest GDP per capita among the countries for which the IMF publishes data. GDP per capita is a popular metric for assessing a country’s average prosperity and well-being, allowing easy comparisons between countries with different populations.
Is real GDP per capita a good measure of wellbeing?
GDP is a crucial indicator of an economy’s size and performance, with an increase in real GDP often indicating good economic health. When GDP is growing strongly, employment is likely to increase as companies hire more workers and people have more money in their pockets. Conversely, when GDP shrinks, employment often declines. Real GDP growth moves in cycles over time, with periods of boom, slow growth, or recession. In the United States, there were six recessions between 1950 and 2011.
To compare GDPs of two countries, one must convert the GDP of each country into U. S. dollars using market exchange rates or purchasing power parity (PPP) exchange rates. The ratio of market and PPP U. S. dollar exchange rates is typically between 2 and 4, as nontraded goods and services tend to be cheaper in low-income countries than in high-income countries. For advanced economies, market and PPP exchange rates tend to be closer, resulting in higher estimated dollar GDP for emerging market and developing countries when using PPP exchange rates.
The International Monetary Fund (IMF) publishes an array of GDP data on its website and calculates global and regional real GDP growth. These aggregates are constructed as weighted averages of the GDP in individual countries, reflecting each country’s share of GDP in the group. PPP exchange rates are used to determine the appropriate weights. Overall, GDP is essential for understanding the size and performance of an economy and its overall health.
Why GDP is not a good indicator of welfare?
GDP is an economic measure that does not consider the welfare component, as goods and services produced may not contribute to a society’s overall welfare. For instance, high-end luxury goods like guns and narcotic drugs may increase the monetary value of production but not contribute to the majority of the population’s welfare. Additionally, GDP does not account for non-monetary transactions, particularly in less developed countries, and does not consider the level of prices in a country. Inflation can lead to an increase in the cost of living, causing a decrease in the standard of living, which does not affect GDP as an index of welfare.
What are the flaws of GDP per capita?
The text identifies the shortcomings of the prevailing methodology, including the exclusion of non-market transactions, the inability to accurately portray income disparity, and the inability to evaluate the sustainability of the nation’s growth trajectory.
Why is GDP not a good measure of economic activity?
GDP is a commonly utilized metric for assessing a nation’s economic performance and well-being. However, it is not without limitations, including the exclusion of non-market transactions and a lack of consideration for income inequality within society.
What are the limitations of GDP capita?
It is important to note that GDP has inherent limitations. These include the exclusion of non-market transactions, the failure to account for income inequality, and the inability to determine the sustainability of a nation’s growth rate.
What does GDP not reflect?
GDP is a measure of the value of all services and goods produced in an economy at a specific time. However, it does not encompass leisure or environmental quality, as it only includes market-exchanged products.
How can GDP per capita be misleading?
Per capita is the average number of citizens in a country or area, but it can be misleading as it includes all citizens and fails to account for statistical outliers. The median income takes into account these outliers. The World Bank issues data on total GDP and GDP per capita, but each can provide conflicting perspectives on a country’s economic state and the wealth of its people. Some economists argue that a country’s aggregate economic growth, or GDP, is not important when focusing on the poverty level of individuals. For example, a GDP growth of 3 may not account for the population growth of 1. 5, making the GDP number less impressive.
📹 Why GDP Is Overrated & Nobody Should Care About It!
························· GDP is one of the most universally recognized terms in economics.
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Alan Greenspan and Ben Bernanke are walking down the road. They come across a pile of horse manure lying on the asphalt. Alan Greenspan says: “If you eat it I’ll give you $20,000!” Ben Bernanke runs his optimization problem and figures out he’s better off eating it, so he does and collects his money. Continuing along the same road they come across another pile of horse manure. Ben Bernanke says: “Now, if YOU eat this I’ll give YOU $20,000.” After evaluating the proposal Alan Greenspan eats it and collects the money. They go on. Bernanke starts thinking: “Listen, we both have the same amount of money we had before, but we both ate horse manure. I don’t see us being better off?” Greenspan replies “Well, that’s true, but you overlooked the fact that we’ve raised GDP by $40,000 and created 2 jobs!”
Engine question: Yes, the parts and labor should be included. The fact that the engine will eventually break down is reflected in the starting price of the engine. You would pay a lot more for an engine that would never break down than one that depreciates over time and needs money pumped back into it from time to time to get its value back. By buying the engine and using it, you have extracted its value.
“We need to start measuring the right things in order to make sure our economy is geared toward maximizing our health and well-being. Instead of stock market prices, we should be maximizing our quality of life, health, mental health, childhood success rates, and environmental sustainability.” — Andrew Yang
Medical student here: chiming in about your comment about measures of health being “just fine”. Actually, thats exactly how most medical investigations work. In medical lingo, we talk about the specificity and sensitivity of certain medical investigations (refered to as Ix from here out) – like CT scans/X rays, certain physical exam special-tests, and blood/urine/CSF tests. Simply put, the specificity and sensitivity of the tests talk about how well the test reliably picks up on certain findings in certain diseases. There are only a handful of investigations that approach the near-perfect ranges for either sensitivity or specificity, and usually never for both. So yes actually, a lot of measures doctors use are “good enough” or “just fine” levels of imperfect tests and measurements – they’re the best we’ve got in current medical evidence, and most of the time they do the job well!
“Living standards have increased, they have just increased massively for one person rather than 500.” I mean, is it a massive increase in living standard to get a boat? I´d argue its a marginal increase in living standard for one person, at the alternative-cost expense of a massive increase for 500 people. They´re not equally meaningful even if we just compare to one person. A small point to an otherwise great criticism of GDP-fixation. Edit: Oh no im the hippie
Here is a little example of how weird GDP is: Consider a divorce. In terms of well-being, it is usually better to be in a loving marriage than divorced. But suppose a couple does get a divorce. They’ll then need two homes, two sets of pots and pans, two bedrooms for each child, two of everything whereas before they might only have needed one. Plus they need to pay the divorce lawyers and for court documents. All of this is great for GDP. So if a country wants a great boost for their GDP. Just encourage divorces. Is it a better world with happier healthier people? Nope. But the GDP figures will look great.
Of course fixing up a product and reselling it should be counted into GDP, they created “information” into the system. In terms of physics, they lowered the entropy, which a very valuable product, even if new “mass” wasn’t introduced. If fixing isn’t counted, any software products shouldn’t be counted either, like Google products, meteorology or almost every non-factory jobs, since they are just selling information.
What really grinds my gears about the focus on GDP is that there is so much production and consumption that are not exchanged. If you don’t work for money, but you are a homemaker who does a lot of work for your family, then you are producing services that are valued by your family and yourself. This work isn’t a part of GDP, but it is undeniably valuable, and measurably so.
I heard the arguement once that stay at home mothers dont contribute to gdp, yet still do the work of maids, teachers, daycare and restaurants. The only thing that matters is average net worth – cost of living dont know if there is an acronym for this already but this just feels like a way more accurate representation of how wealthy a nation is.
Yup, this is very true. I think there’s 2 other points that could have been mentioned with regards to value of GDP. Instead of just mentioning the “underground” economy, there are services that add value that aren’t reflected in GDP figures, such as childcare. If every mom swapped kids and babysat someone else’s kid in exchange for money, then GDP would all of the sudden skyrocket, as lots of money is exchanging hands, yet no difference in value would be added, arguably even lower value with poor parenting. This is what Andrew Yang was mentioning in his UBI request – that a stay-at-home mom’s value isn’t added to GDP. As well, financial services (investment banks, hedge funds) and real estate rent collectors (buy low sell high people, after the value of the home has already been accounted for) – they are placed inside the “production boundary” as adding significant value to economies, yet little of what they due reflects as real value-added to the economy. In places like Canada, Real Estate leasing (not home construction, just the renting) is the #1 driver of GDP, and Finance is #4. Is a person that buys up 100 homes, and re-lists them for higher rent to young families who can’t afford a new home since limited home supply has driven up prices, added more value to the economy than if that young family just mortgaged the new home themselves?
Using the mechanic as an example I would say his work should be counted in GDP. If he dose not replace the engine then there would be one less car to go around, and yes the owner of the car could go out and buy another one. But that would not be the most efficient use of their capitol. And under the logic of not counting the mechanic work in GDP accounting, insurance, or any other service industry should also not be counted because nothing new has been created right or have I missed the point completely. Amazing articles keep up the great work.
While I felt that this article was pretty good overall, it does seem to rely on a strawman argument. Personally, I have never seen anyone argue that GDP is the only economic metric that matters. If anything, most discussions concerning it have been fairly critical (mostly using the same arguments featured in the article). For instance, the 2008 recession technically ended in June 2009 in the United States. However, there were virtually no observers who argued that the American economy was fine at that point simply because the nation’s GDP was growing. Similarly, Ireland’s GDP increased by over 26% in 2015 due to Apple’s tax reporting. However, reporting on that topic seems to indicate that no one is under any illusion that it actually reflects economic conditions on the ground. To be clear, I am largely speaking from my experience as an American. The idea that people don’t keep the limitations of GDP figures in mind may be more relevant elsewhere. But to my knowledge, this doesn’t seem to be the case. Sources: federalreservehistory.org/essays/great_recession_of_200709 irishtimes.com/business/economy/ireland-s-gdp-figures-why-26-economic-growth-is-a-problem-1.2722170
Tracking GDP is interesting because it gives us an idea about how the economy is performing overall. By keeping track of its changes, policymakers can determine which phase of the cycle we are in and adjust policies (monetary and taxes). It also matters to investors, best-performing investments depending on the cycle too
Yes, installing a new engine should count for GDP because technically a car without an engine can not count as a working car. So the new engine and the rest of the old car can only be car-parts and when you put them togeter you create a “new” car. And obviously some value is created aswell since the car without engine has no actuall value beyonde the raw materials.
Wow thank you to do the job for me! I had so many debates about the GDP and was always put down by the ignorance my opponents. I noticed that most of people are simply just parrots of their own mass media and “todays trends” without even questioning the called information. To add to your great points I have 2 other examples: Removing the appendix is one of the most simple surgeries a patient can get. In USA this surgery costs on average 33000$ and can go up to 65000$ (JFK Medical Center in Atlantis); In Austria it costs around 2530$; In Russian Federation – around 400$ (in a quite expensive hospital). This surgery is not a rocket science and is performed very quickly and without any special medication. There is practically nothing a doc can do wrong… and yet there is almost 90 times difference in price. NO matter where you do it Russia or USA the result will be the same. All those countries which have those insanely high costs for simple surgeries are being considered into their GDP under “provided servicies” and thus blowing it up substentially. And yet GDP numbers don’T care about productivity at all. Example #2: We have 2 enterprises A and B with same profits. Enterprise A decides to boost the health of its employees. It uses 10 million$ per year of its profit to build a medical facitily, pay the doctors and medication and treats the employees accordingly. Enterprise B also decides to spend 10mil$ on healthcare of its employees and buys them holiday tickets every year for that amount of money.
Make a article on how to decide if you should leave your country and if so when. Pls As Im thinking about how to determine if I should leave my country Im from India and I want to move to New zealand based pn economic condition of our country and opportunities there and mybe throw in some other determinants.
As far as the engine goes I’d argue it should be counted. The engine being replaced adds value to the car since the new engine would have less wear and tear. For this reason in an ideal world the GDP increase would be equal to value of the new engine minus the value of the old engine. How would you caculate the value of the old engine? I’ll answer that with an accounting example. Engine value =1000, estimated life=10 years, therefore every year it decreases in value by 100 If after three years the engine is replaced then GDP goes up by 300+labor. Whatever happens to the old engine would be a separate figure. Edit: Of course it’d be ridiculous to assume that this could possibly be implemented, and this is obviously oversimplified but, hypothetically this is how the engine should be counted when it comes to GDP.
Yes it things like a car repair should be counted in gdp. My logic is that the shop had to buy the parts to use to replace whats broken on your engine, which means someone had to collect the resources and shape them into parts every step of the way those transactions are being taxed and used to pay salaries, those salaries paid by the transactions will be used to buy food, pay rent or mortgage or for any other thing which will also be taxed and so on.
there are just certain things that we cannot control all the time and in this case, counting of repairing service into the GDP. Talking about emergent order or spontaneous order, in such a economic system that applies that order, the beauty of nature appears. We should be amazed at the fact that things are just working and functioning themself rather than trying to have control over everything that’s happening. If we do ever try our best on controlling and tracking every services and products that are being repaired or fixed. We will not be benefit from it but only cause even more chaos because that’s just what happens in a demanding system.
@Economics Explained Just take a look at the United States. Very high gdp per capita, but borderline third world when it comes to other issue’s. America baffles the world with it’s economic might coupled with a backward society with high levels of violence. It’s also the global champion of incarcerating it’s own people. America’s human rights records is poor at best. America is also a flawed democracy, the poor American masses can really only choose between two corporate(superpacks) controlled parties. Just to name a very few examples.
A often overlooked Problem with GDP is Population trends I a time over the next 20 years. where europe, northern amerika, some of the stats in southamerica, china most of east asia, basically everything except the middle east and afrika, will have declining populations. So which germany is richer, that with 8 Trillion GDP and 80 Million People or Germany of 7,5 Trillion GDP and 60 Millionen People? If Productivity and Consumption dont really go up a lot, this will be a Problem for Economits and Politicians. For Example Italy lost about 0,3% Percent of its Population the last 5 Years, and its GDp declined by 1,5% over that time, it will have Problems with GDP to Debt ratio. We really need to think about those Metrics.
Also, by just increasing immigration you will increase your headline GDP figures, while GDP per capita may be going nowhere. Regarding the question on whether a new engine should be included.. It should. Total wealth is always declining – things depreciate over time, so we need positive production figures just to stand still. We are all on the wealth treadmill. So buying a new car to replace your 20 year old one is similar to fixing a broken car – we are just adding production to keep up with the depreciation treadmill. There will always be a component of GDP that is just compensating for depreciation.
Personally I believe services like your example of car repairs should be accounted for in GDP, since a new good (a new engine) is needed, a service is being done (the repair) and a customer pays for it. So I do not see why it shouldn’t be a part of GDP. On the other hand, if the people that use GDP are aware of the specific factors NOT included, it levels out the playing field. Everyone knows what they are working with and that is the purpose that these comparative standard measures serve.
The United States has a higher gdp per capita than most developed countries, still the United States is a BASKET CASE. It has the world’s reserve currency. But it’s living standards are similar to Cuba, a small nation under a trade embargo for the past 6 decades. The life expectancy are similar to Cuba’s, despite Cuba being ”poorer”. It shows how US fails on a epic scale when it comes to human diginity. United States has the largest prison population on earth, more than Communist China, a nation with 4 times the population. Homelessness, mass shootings, racial persecution, a generation shackled by debt, dissappearing social mobility, drug addiction deaths, apartheid in the healthcare sector and more. Hollywood propaganda portrayal of a great America is not working. If the trade embargo was removed on Cuba, it would have higher living standards than all of Western Europe. So yeah GDP is highly overrated.
I think maintenance should count as GDP, as it is still consumption of labor and materials. Without that maintenance you’d be down a working car, so the repair is also producing the function of that car. Imagine a society with a stagnated economy, with no crises and also no new technology or innovative businesses. Further imagine that these people are frugal, and have what they need, and just need to maintain it (repair their care, refill their fridge with groceries, etc). We wouldn’t call their GDP $0 just because they are in a holding pattern. All the things that just maintain the status quo should count towards GDP.
11:36 “Living standards have increased massively for one person instead of a little bit for many people” I disagree. Someone had to design the ship, build it, inspect it, staff it, transport the materials to make it. The construction of that 1 yacht probably created 1,000 jobs directly and indirectly that wouldn’t have existed if it weren’t for that billionaire.
GDP is simply an economic indicator to how big and healthy a market is in a country. And this is an important indicator to any investor or lender to the country to look at. If government and consumer spending is high, it means the purchasing power of both ppl and gov is high and also means there is a market here for any investor out there. Same to if net export is high it means there is cash there. And lastly if investment is healthy, diversified and high it also means continuity with less risk from depending on local resources. GDP just makes it simpler by giving the sum of all that. Regardless if it includes pile of repeated transactions, this means money is in reach of most ppl in that country and high cash rotation is also a good indicator. GDP is awesome.!
Every time I hear ‘per capita’ I laugh inwardly!’ So with the logic of ‘per capita’ I could walk up to a homeless person and say ‘the net wealth of the people living in the usa is blah blah blah per capita, so get off the street and go buy food, clothing and shelter’ You see how imbecilic that sounds?! The moment anyone says ‘per capita’ with anything, I get real suspicious (to say the least) at best, and god knows what, at worst!
On the engine : no it shouldn’t It makes economies with badly made cars seem more productive. If car repairs counted many badly made cars that need repair would inflate gdp making it look like productive output is great, but it would make an economy with well made cars that need less repairs seem less productive. Nothing new has been created and while something has been fixed, An economy that has less need to fix cars is more productive because the cars are of superior quality. By that logic bad cars would contribute more to gdp than good cars.
The government expenditure part of GDP is also quite misleading. If a country’s government spent virtually its entire budget on a massive fleet of aircraft carriers, and then blew up all of those aircraft carriers in the middle of the ocean, they would have a MASSIVE spike in GDP, but everybody in the country would be much, much poorer
I think the repair should be included. Without the repair the car would essentially be lost Repairing it returns the item to useful survive and does help the economy. I would include the price of the new engine and the labor. Otherwise your metric would say that maintaining a bridge is bad and that it is better for the economy to let the bridge fail and then be replaced and that is clearly not true since the economic damage while the bridge is not there is large. If the GDP metric favors letting the bridge collapse and replacing with a new bridge it is a bad metric since optimizing it also creates bad outcomes for the economy.
Re: the engine replacement? I’d say it should count. Yes, there isn’t a new car on the road. But a car without a working engine is just a really big, expensive paperweight. Hence, buying a new engine and the labor to put it in should be counted, since without it, there would be one less car on the road.
Replacing the engine should not count towards GDP. Something new is produced, as we just turned a non-working car into a working car, but I think the bigger issue here is with a working car turning into a non-working car in the first place. The upkeep costs associated with capital, like repairing your car, could be subtracted from GDP to find the total increase in value in the country. In practice, this is already done by firms writing off the machines they use. However, since most households do not account for depreciation in their tax filings, the depreciation of their assets will not transfer to official GDP figures. Edit: Upon having seen the rest of the article, it’s basically your argument about waste. A country that produces high-quality cars that won’t easily break down will have less depreciation. With the same GDP as another country, they will own more value at the end of the day.
In Mexico, our current president promised that he would grow our country gdp more than their neoliberal predecessors. Now that his policies scared away investors and the economy started to decrease (even before corona), he is telling us that it’s more important to measure hapiness than the growth or the decrease of the GDP.
GDP seems fundamentally game-able. If you want more GDP, make two companies then sign a contract specifying that every 1 trillionth of a second, they will alternately give each other a single dollar for the service of transferring that dollar. Bam, you now have a GDP of 3.1 quintillion per year. More than all the money in the world currently. And you never actually have to transfer the dollar. It can sit in an account somewhere and ownership of that account is what changes hands.
The car mechanic example actually does create value. The car was used for an extended period of time from when it was new to the breakdown. It transferred its value to whatever work it accomplished. When repaired some of its lost value gets added again and the car can continue to provide value for longer.
You touched on one of the main issues with the use of gdp today – that it counts the aggregate. While you did say that as long as people know that, it’s okay, most people today will not know that. They just walk around talking about GDP and the stock market and say “well see, it all went up so it’s a good economy” despite the insane rising rates of hunger and evictions. Usa becoming a failed state.
at 12:23 is like comparing Germany with USA. What I found very interesting is that even if Germany has a 25% lower GDP per capita as USA, the standard of living of the average person in Germany is much higher than in USA. good healthcare even for poor people, affordable rents (except for some cities), low employment, free higher education, 20-30 vacation days, parental leave etc.
A 33% drop in GDP doesn’t mean a 33% drop in the lifestyle of economics explained viewers because, they are all atleast middle class or upper middle class households. The pandemic hit harddddd on africa and the poor, lower middle class people in developing countries. Their lifestyle would have dropped 100% or even 200% drop in quality. That is why the aggregate is still only -33%. Most of that brunt is borne by the already poor people…
There is a common concern from students and graduates that online learning is viewed(by employers) differently or even, inferior to those who studied the ‘traditional’ way, on campus. I would like to point this out since during this uncertain period Universities from all over the world are primarily focusing on online courses especially Universities that you have to pay handsomely like UK. Online Courses are extremely cheap and affordable while the traditional way of studying at a University is extremely expensive, leading to high fees and debt for the young students. I know you recently made a article about something similar but I think it would be interesting to discuss the recent developments of online learning and what would be the economic impact on countries that provide this kind of service to students in all over the world. E.g. UK and US Btw your articles are amazing! Thank you.
Simply, GDP doesn’t indicate the economic prosperity of the people, just how robust the economy itself is. So if you define a good economy as a strictly well-performing economy, GDP can help you figure that out. If you define a good economy as an economy that people are prospering under, than don’t use GDP to measure that. A country can have both a great GDP and economic prosperity of the people of course, but you could also have a lower GDP, but the people are doing pretty well. And vice versa. I’m glad I was able to figure that out eventually, I wasn’t taught that in any economics class.
PPP GDP takes into account countries different currencies.Say a shirt costs 5 dollars in the US and the same shirt costs 8 Euros in Germany but when converting 8 Euros into US dollars you get 5,50 dollars. Other words PPP GDP is the correct way to measure a countries GDP because it takes inflation into account.
my two main issues with GDP are: a) The assumption that we can forever expand the economy and produce/ consume more, within the limits of a finite planet. This makes our current model that uses GDP growth as an indicator to a nation’s wealth unsustainable and we are already seeing the consequences of this. b) Sure, higher GDP offers higher standards of living, but it doesn’t actually account for individual prosperity – do ppl in countries with higher GDP feel happier and more fulfilled than people in countries with lower GDP? So what are we really focusing on, economic activity, or the individuals of a society..? What is the measure for actual societal prosperity if we only care about GDP growth?
Certainly should be counted. GDP should represent how much money is moving in a certain territorial space and the willingness of the people living in that delimitation to trade with others. A healthy economy should see GDP numbers rising because more trade is being made between individuals, not necesarily that more things are being created. In the end, economy is about giving others value and getting rewarded for that value provided. A mechanic that fixes your engine is providing you with a service that you (supposedly value).
I actually work at a national statistical agency and we got a briefing on how gdp is calculated for a nation and yeah, it’s pretty sketchy. Not that my country is doing anything explicitly wrong (national accounts like this are actually internationally standardized), but what they are supposed to measure VS what they are feasibly able to measure is vastly different. You hinted at it before, by the law of national accounts, me selling you some contraband in a shady alley is the same as me selling you a bag of chips. So a lot of GDP is estimated based on the best available data. Basically it’s like taking the overall average of all your years in school as a letter grade and using that to determine whether you are smart or not. It just doesn’t really work like that, there’s a lot more nuance. Great article though!
Maintenance is work energy going in the attempt to reverse entropic systems. By definition maintenance is not growth, it is energy allocated in keeping a system in its present functional state. Brushing your teeth or getting surgery does not assist in the increase of ones net worth, it assists in ones ability to maintain potential to put energy towards the system that creates higher net worth.
Yeah services are definitely important enough that they should be included. Think about it, it should at least be reflected in the score in some form or another if there’s elevator repair guys, underwater welding, etc. Even just for repairs or maintenance, it should be reflected in some aspect or another.
I mean, a lot of GDP figures are created by the exploitation of people to make the most profit, usually at the detriment of normal people. Two examples of the cost being much higher than the value is; Crappy internet and cable companies in the U.S, and the extreme prices of healthcare in the U.S. Are they really creating as much value as they say if they are just taking advantage of an inflated income in the U.S plus the agreed upon non-competitiveness of the industry to take as much money as possible?
5:40 The world DOES have an extra car. A car without a functioning engine is just a bunch of metal and plastics on wheels. The moment the engine failed the car became almost worthless until someone fixed it. Since things naturally deteriorate (such is the nature of the universe) it is only natural to count this fight against ever increasing entropy as generating value. Otherwise I might as well say building a table doesn‘t produce any new value because you didn‘t create any new wood, you just made it useful. I personally think investment might just be the most questionable part of this equation since it essentially counts things twice. An example: You would like to build a table but you don‘t have the money to do so. I invest 500$ in you so you can build said table. After the table is finished we now have an extra 1000$ of GDP since the investment AND the table counts toward it, eventhough we only have one extra table to show for it. It gets even worse if you decide to invest in something that is never going to work (like Theranos). In this case we basically magic GDP into existence while loosing an obscene amount of money.
“… when a 33% drop in GDP was recorded.” The 33% figure for the US was an annualized figure over a single quarter, implying a drop (for that quarter) of about 9.5%. That’s not even remotely close to the same thing as a 33% drop. Extrapolating GDP changes from a single quarter over an entire year is only meaningful when the trend can reasonably be expected to continue. In this case it’s not expected, so the 33% figure is worse than meaningless.
The engine not being addressed for gdp is just that way because it’s easier to just take the price of the final product, rather than counting every single screw the car has, we could write the gdp of every single transistor in a cpu, but at the end, it’s going to be equal than the cpu as a whole, so a new engine is being produced as a single final product, in other words, a percentage of a car, if your car wouldn’t had broken, then you’d be having dual engines and in turn, added value and bigger wealth.
It should count for the purposes of GDP Value can have a limited time horizon. If you are to argue that the engine did not create value because the world is not up a car, then you could just the same argue that almost every car created before 1960 created no value. Obviously those cars created value, it’s just that the value was transfered to movement. Thus, when the engine broke down, that means that that engines value has been exhausted and a new engine will fill it’s place to help convert it’s value into movement.
As a general rule, regardless of the political leanings of the administration in turn, and without really in depth economic knowledge; I like to ask those who defend/attack any administration for the growth, contraction or stagnation of the GDP(being here in the US or my parents in Mexico), “how has that measurably directly affected you?” And when I use the word “affected” it can be positively or negatively. More often than not there is no real answer. My in-laws were sort of justifying the current administration in the US with “the greatest economy” and I flat out asked them (one is a very well salary-paid manager and the other is an underpaid public school teacher, both white, living in semi-rural Ohio) how have this actually affected you? The teacher replied with a slight sigh and after a silence she says, “well our taxes actually went a little bit up…” and the manager intercepted “if you see the unemployment at all time record low, that’s definitely a good thing”. I said “well yeah, the trend was going in that direction for the past 8 years or so, and I guess not tearing down the progress is now a reason to celebrate, I guess…” In Mexico is kind of the opposite, lack of PIB growth (the Spanish language acronym for GDP) is a huge measure for complaints against the current administration. So I asked my parents exactly the same question. Their answer was “well, you know, ultimately it matters more what they do to create jobs…” So, my take on the GDP and the perception amongst ordinary people is that of the direct correlation with job creation, which as you passingly mentioned, is maybe true but to a very small extent, but is extremely powerful as an influential reasoning to measure a government’s success or failure, because that’s what the ruling class, you know, the ones reaping the benefits of a huge GDP, want us to focus on.
About the engine: Yes it should be included. From a very rough perspective, it doesn’t matter if we choose to include it or not, as long as the choice is made consistently. So it’s up to the individual economy to choose which version to lean towards. But barring any shady business, almost all economies will want to report a larger value. So reporting the engine leads to the most consistent outcome. Another perspective is that GDP is frequently (mis)used as a measure of economic wellbeing. In that case hiring someone to build / install an engine is valuable economic activity — resources are changing hands. Therefore it contributes to economic wellbeing.
Hey EE, I wanted to thank you for all the interesting articles. I’ve been enjoying them for a while now. I just started studying economics in Switzerland and for me that has made perusal your articles even more interesting as I’m starting to get a deeper understanding of the concepts and mechanisms your describing. I wonder if you’d consider making a article about yourself I would be very interested in your background (if you already have sorry I didn’t find it).
Since I am unemployed in France, I would have liked so much a decreased of my income of only 33% since march…. 🥺 Also, small anecdote : in the EU, most countries include a % of informal economy in their GDP especially the south ones (Italy,Greece,Spain, it jas been discussed in France’s national parlement).