A brief History of GDP

1937: Simon Kuznets, an economist at the National Bureau of Economic Research,

presents the original formulation of gross domestic product in his report to the U.S.
Congress, “National Income, 1929-35.” His idea is to capture all economic production by
individuals, companies, and the government in a single measure, which should rise in
good times and fall in bad. GDP is born.

1944: Following the Bretton Woods conference that established international financial

institutions such as the World Bank and the International Monetary Fund, GDP becomes
the standard tool for sizing up a country’s economy.

1959: Economist Moses Abramovitz becomes one of the first to question whether GDP

accurately measures a society’s overall well-being. He cautions that “we must be highly
skeptical of the view that long-term changes in the rate of growth of welfare can be
gauged even roughly from changes in the rate of growth of output.”

1962: But GDP evangelists reign. Arthur Okun, staff economist for U.S. President John
F. Kennedy’s Council of Economic Advisers, coins Okun’s Law, which holds that for
every 3-point rise in GDP, unemployment will fall 1 percentage point. The theory
informs monetary policy: Keep growing the economy, and everything will be just fine.

1972: Upon being named king of Bhutan, Jigme Singye Wangchuck declares his aim is

not to increase GDP, but GNH — “gross national happiness.”

June 1978: Writing in Britain’s The Economic Journal, Irving B. Kravis, Alan W.

Heston, and Robert Summers compile the first estimates of GDP per capita worldwide,
with figures for more than 100 countries.

Gross Domestic Product

 Is the broadest quantitative measure of a nation’s total economic activity. More

specifically, GDP represents the monetary value of all goods and services produced
within a nation’s geographic borders over a specified period of time.
What is GDP used for?

 GDP is one of the primary indicators used to gauge the health of country’s economy.
And Economist can use GDP to determine whether an economy is growing or
experiencing a recession. And also, Investors can use GDP to make investments
decisions— a bad economy means lower earnings and lower stock prices.

GDP vs. GNP: An Overview

 Gross domestic product (GDP) is the value of a nation’s finished domestic goods
and services during a specific time period. It means that GDP looks at the value of
goods and services produced within a country’s borders.

 Gross National Product (GNP) is the value of all finished goods and services
owned by a country’s residents over a period of time. It means that GNP is the
market value of goods and services produced by all citizens of a country— both
domestically and abroad.

What department of the government computes the GDP?

 It’s NEDA or National Economic Development Authority, who particularly

computes the Gross Domestic Product. Through research and survey per household.

GDP Per Capita

 Is a measure of a country’s economic output that accounts for its number of people. It
divides the country’s gross domestic product by its total population. That makes it
the best measurement of a country’s standard of living.

IMPORTANT NOTE: There is no particular benchmark basis in order to specify

whether a country is developing or not, for GDP is only a statistical basis to be analyzed
for research purposes.
COMPONENTS OF Gross Domestic Product

1. Personal Consumption Expenditures

2. Investment
3. Government Purchases of goods and services
 “G” (government spending) is the sum of government expenditures on
final goods and services. It includes salaries of public servants, purchase
of weapons for the military, and any investment expenditure by a
government. However, since GDP is a measure of productivity, transfer
payments made by the government are not counted because these
payments do not reflect a purchase by the government, rather a movement
of income. They are captured in “C” when the payments are spent.
4. Net Exports
 “X” (Net Exports) represents gross exports. GDP captures the amount a
country produces, including goods and services produced for other
nations’ consumption, therefore exports are added.Net exports is an
important variable used in the calculation of a country's GDP. When the
value of goods exported is higher than the value of goods imported, the
country is said to have a positive balance of trade for the period. When
taken as a whole, this in turn can be an indicator of a country's savings
rate, future exchange rates, and to some degree its self-sufficiency.
Another term for net exports is the balance of trade (BOT). Positive net
exports represent a trade surplus, while negative net exports imply a trade
deficit. Exports consist of all the goods and other marketable services a
country provides to the rest of the world, including merchandise, freight,
transportation, tourism, communication, and financial services.

The Distinction between Real GDP and Nominal GDP

Nominal GDP

It is the sum total of all services, goods and finished products produced in a
country. Nominal gross domestic product is very easy to calculate as it based on the
current market prices of the goods and it is also very easy to understand. However, its key
disadvantages are that it doesn’t consider the effect of inflation and it can’t compare the
relationships between price and quantity.

Nominal GDP = Quantity x Price

Real GDP

Does not compute the GDP at a current market price. It takes the price of a base
year and then calculates the quantities produced of the current year and then multiply the
two to find out the GDP. Nominal Gross Domestic Product is the sum-total of all the
goods, finished products, services produced during a particular year after taking inflation
into account.

Real GDP = Quantity x Price of base year

Example:

Nominal GDP Year1 Nominal Year 2

Total Total
Output Quantity Price Output Quantity Price
GDP GDP
Apple 4 ₱5 20 Apple 5 ₱6 30
Orange 5 ₱6 30 Orange 3 ₱7 21
Total 50 Total 51

Real GDP of Year 2 (Year 1 basis)

Quantity Price of
Output Total
of Year 2 Year 1
Apple 5 ₱5 25
Orange 3 ₱6 18
Total 43
 Is GDP a good measure of economy’s well being?

GDP is the best way to measure the economy's well-being. Through the data
gathered, it can determine whether the nation is in expansion or recession, and thus can
formulate an immediate action or predictive measures depending on the status of the
economy. For example, the unemployment rate; higher GDP means lower unemployment
rate in the economy, indicating that the status of the economy is stable. Meaning, the
firms hire more people to work, while the workers can produce more goods and services.
At the same time, with their income, they can spend more, thus we can say that the
market is healthy. GDP also measures the capability of the economy for growth, because
larger GDP means we can, for example, afford better educational systems, facilities and
institutions for the people to use. It can also mean that we have more funding for
infrastructure projects and other activities that will help the nation and its people.

Although GDP is the best measurement of the economy's well being, it is not
100% accurate. It is because goods and services without inventory are just measured by
market surveys and does not include the products and services with no market value.
Suppose, for instance, when a mother buys a carrot from a supermarket. The value of the
carrot is counted or included to the nation's GDP but it is not recorded when the mother
plucked it out from their yard, although both is consumed in equivalent value by a
household. But although it is not 100% accurate, we can say that GDP is utmost almost
accurate to be the basis of the economy's well being. It is also useful in guiding
policymakers and business owners to make decisions that will contribute to the growth of
the economy.