This is the third part in as many as possible in this series.
I decided I needed help in terms of topics to do this for, so, I put an RFP out to some of my friends asking them to give me topics I could do this for.
I look at these exercises as an opportunity to understand the concept better and simplify it enough so that it is explainable to a child.
The concept for this post is : GDP
GDP is an acronym that stands for Gross Domestic Product.
Lets take that part by part.
Gross can have multiple meanings. When used as an adjective to describe something, it means something bad or not nice.
It can also mean the total of a set of things.
Domestic here means, in the country. That’s simple enough.
Product really stands for something that’s been made and then been sold to somebody else.
So, if you were measure GDP for you as an individual, it’d simply be how much you made by selling stuff that you created or things you did for people.
When it comes to countries however, it gets slightly more complicated, but, only slightly.
To measure GDP for a country for a year, we now have to take in account a bunch of things.
The first is the total amount being spent by every single person who lives in that country on stuff made by other people, wherever they are. We call this Consumption
So, to simplify this, lets take a typical family household, its consumption is simply the total amount of money that every single member of that family spends on stuff that they might buy from someone else in that house or buy from a shop nearby. If you bought 10 things from a family member in your house and 10 things from a shop nearby, your total consumption was the cost of those 20 things put together.
Second, there are things that people spend money that return value over a period of time longer than the period for which GDP is being measured for. These are called Investments
If you decided to spend money on a potato peeler for your house that would enable you to peel potatoes faster as a result enabling you to sell more peeled potatoes, that would count as an investment. You’d have to spend money to buy the potato peeler, but, you’re going to be earning more money by selling peeled potatoes rather than just potatoes.
Third, the entire house could have some money that it has or has borrowed from somebody else that the people who run the house want to spend on things that they feel would benefit the house as a whole rather than just one person. This is simply called House Spending. When the Government does it, its called Governmental Spending
Fourth, when we talked about Consumption, did you notice that no matter who you bought stuff from, whether they were in the house or outside of the house, it counts as a part of your consumption?
See, that’s a problem, because, it doesn’t give any indicators of how much stuff you actually bought from inside the house, meaning it doesn’t tell me how good the people in the house are at making stuff.
So, lets call the money you spent to buy stuff from outside the house, Import.
Inversely, let’s call the money you made by selling stuff that you made to people outside the house (like the peeled potatoes), Export.
Now that we have those definitions out of the way, let’s measure GDP.
GDP = Consumption + Investments + Governmental Spending + Export — Import
Or simply put, GDP is the total of money spent on buying products or services in a country plus the investments made towards making better products and services plus the money the government spends on its people plus the money made through selling products or services to people outside the country minus the money spent on buying products or services from outside the country.
What is this useful for?
If measured accurately, it can be useful for getting a picture of how healthy a country’s economy is. But, its important to remember, it isn’t the whole picture, its just an indicator.
This is a simple explanation with examples I came up with for a fairly simple topic.
Would love to hear any comments/criticism/feedback, I’m just trying to improve here.
I’m working on a follow up on what is GDP useful for.
Thank you for reading