A simple way to think about GDP

The most important question to come out of the video we shared the other day was of course this one: why did South Korea grow so much faster than India?

 

But in order to answer that question, we first need to ask another. And this question is a very important one from a theoretical perspective. When we say South Korea grew faster, what exactly are we measuring? In other words, the growth of what, exactly?

 

There are many, many different sources for understanding more about GDP – its definitions, its measurement, and the data associated with GDP in an Indian context. We have a post up about this ourselves. But in this post, we aren’t going to cover any of these topics – we’re going to give you a simple way to think about what GDP is, exactly.

 

Here’s a question: do you remember how many marks you scored in your final math exam when you were in the fourth standard? Of course you don’t. But if I were to ask you your favorite memory of the time that you spent in the fourth standard, an answer is far more likely. And GDP, for a nation, is kind of like marks for a student. It is a very good way to objectively measure progress, but it is equally important to remember that just as marks aren’t all that a student’s life is about, GDP isn’t all that a country’s progress is about.

 

That being said however, measuring a country’s performance by measuring its economic output is the best we can do right now. This (measuring a country’s GDP) is important because it allows us to do three things:

 

  1. It allows us to settle, insofar as these questions can be settled, the issue of how much income we generated in one year (or one quarter, or one month)
  2. It allows us to find out how much more we produced compared to our own output in the previous year (or the previous quarter)
  3. It allows us to compare ourselves with what other nations have been up to in the same time period.

That is to say, it allows to be objective about our performance, and allows us to compare across time, and across space. Without us, and South Korea, and all other nations on this planet using more or less the same methodology to measure economic output, comparisons would be impossible.

 

So if you’ve always wondered what the big deal about GDP is, you are right, in a way. GDP is to a country as marks are to a student. Very important, and the most objective way to measure progress, but certainly not the be all and end all.

 

So all right, when we talk about growth, we’re talking about GDP growth. However, if you go back and take a look at the video, you’ll find that the horizontal axis is talking about GDP growth adjusted for inflation and purchasing power parity (PPP). We’ll be talking more about these concepts in our follow-up blog posts.

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