GDP or Gross Domestic Product is the total monetary value of all the final goods and services produced within the geographical boundary of a country in a given year.
How the GDP is calculated?
The GDP is calculated either by the method of Income Approach i.e. adding up total compensation to employees, gross profits for incorporated and non-incorporated firms, and taxes less any subsidies in a year or by Expenditure Approach, i.e. by adding total consumption, investment, government spending and net exports or by Production Approach i.e. by summing up the “value-added” at each stage of production. Here, value addition is defined as total sales less the value of intermediate inputs into the production process. All the measures are expected to reflect same outcome.
The formula of GDP can be expressed as follows:
GDP = Consumption (C) + Investment (I)+ Government Spending (G) + [Exports (X) – Imports (M)]
Generally, we get to know about two types of GDP which are as follows:
- Nominal GDP – Nominal GDP is measured at current market prices. The changes in the prices from year to year also known as inflation or deflation rate includes in the value of GDP.
- Real GDP – This is the inflation adjusted measure of GDP. With this measure, the change or rise in the GDP also gets recorded but that is solely for the increase in the production.
To understand a country’s economic performance in a given year, the value of nominal GDP is useful but when it comes to measure the growth of the country from year to year, then use of Real GDP is more preferred. The inflation adjusted value of Real GDP helps to understand country’s exact growth from the perspective of expansion of production/industry. The value of nominal GDP includes the change in the inflation rate and it makes the value of it greater than the Real GDP in most of the cases. The global performance of the nominal and Real GDP growth rate in the last few years can be understood from the following chart.
What we can actually understand from a country’s GDP figure?
The GDP indicates the economic performance of a country in a year. When a country’s Real GDP growth rate is seemed to be positive and increasing over the years then it is understood that size of the economy is rising. The booming GDP generally reflects the following situations:
- Rise in the production
- Hike in the wage rate of labour force
- Expansion of industries
- Increase in the government expenditure
- Higher absorption of advanced technology
- Growing size of workforce etc.
Whereas a decline in GDP expresses a completely opposite situation and degrading condition of an economy.
The GDP of a country also shows how the stock market is performing and based on that the investors decide whether they need to invest more money in the different sectors of that country or they need to gradually reduce or close the process of investment. Whatever the value of GDP reflects is definitely crucial to understand the economic performance of a country but somehow, it’s not enough to measure the all-round development of a nation. The most important thing to mention here is all productive activities taken place in a nation in a year are not included in GDP. Some of them are as follows:
- Household chores (e.g. cooking, washing and multiple domestic work)
- Black market activities
- Volunteering etc.
Otherwise, without the presence of the following factors in the value of GDP, the growth or sustainable development of any country is incomplete.
- Status of the standard of living
- Process of wage distribution across the different job roles in different sectors
- Condition of the infrastructural facilities (e.g. transport connectivity)
- Way of controlling the environmental pollution and maintaining the ecological balance
- Proper maintenance of hygiene and sanitation
- State of healthcare sector
- Scopes of skill development among the youth and workforce
- Opportunities for the establishment of new businesses etc.
For example, there are innumerable developed and developing nations in the world where the GDP is high but income inequality is also the same. The situation can best be described in the following charts:
United States (US), China and India are globally recognized for their significant economic performances. The flourishing economic condition of these three countries is visible here (Exhibit 2 – I and 2 -II). Between 2010 to 2018, the nominal GDPs of US, China and India have increased at a CAGR of 4 %, 10.4%, 6% respectively.
However, the level of income inequality in these countries is also hard to avoid. From the chart (Exhibit 2 -III), it is visible that in US, 47% of the national income is earned by 10% of the population, i.e. the 53% of the national income is c shared by the remaining 90% population. There are around 36 million millionaires and 2200+ billionaires in the world (Exhibit 2 – IV). Their existence apparently raises the national income of the countries. Simultaneously, the average low wage rate of the common people increases income inequality.
To understand the relation between a country’s income and the quality of life that its residents are getting.
Two indices are developed with an objective to assess the balance between Quality of Life and Macro-economic conditions of a few significant developing and developed nations. The difference between the two mentioned indicators obtained by one nation measures how much able they are to make a balance between their standard of living and financial condition.
Methodology of the Index Table:
The measurement of stability between the macroeconomic status and living standards of a few developed and developing nations is going to be done by combining a series of GDP and Quality of life and Macroeconomic or GDP related indicators.
Basic framework to be considered are:
- Theoretical framework
- Data selection
Approach to Index Construction
- Based on preliminary analysis, 38 countries have been selected among which 30 are developing economies and the remaining 8 are the developed ones. The selection process has been done based on their GDP values. The shortlisted countries’ GDP performance in their categories (Developing and developed) have been significant in the last few years.
- The sustainable growth of the countries is expected to be understood from their act of balancing between Quality of life and Macro-economic indicators. 2 pillars have been used to construct this index. Each pillar contains important indicators or sub -pillars which measure the all-round growth of a nation.
Description of Pillars Used in the Index:
Indicators used in the Index under the 2 pillars:
Result of the Index
Explanation of the Index result:
In the table 1 and 2, a column is mentioned as “Difference (Q – M)” which reflects the subtraction value of the outcome of Quality of Life Indicators Index and the Macro Economic Indicators Index. The main agenda of the analysis is to know whether the country has good atmosphere to stay or not. An overall growth of the nation can only be considered, when along with the rise in GDP, the basic and mandatory needs of daily life are also achieved flawlessly.
This situation can be better understood in the following manner, i.e.
Quality of Life – Macro >=< 0 ………. (1)
Now the outcomes of the equation (1) could be,
- Among the 30 enlisted countries of table 1, 15 countries’ (Sl. No. 1 to 15) achieved level of living standards are positive. GDP of all these countries have increased significantly in the last few years. Nominal GDPs of the countries like Qatar, Russia, United Arab Emirates and Philippines have risen at CAGR of 15%, 10.33%, 8.14% and 8.13% respectively between 2000 to 2018.
- The remaining countries’ (Sl. No. 16 to 30) have also changed positively. Specially the nominal GDPs of the countries like Ethiopia, Angola, Kenya, Nigeria, India have risen at CAGR of 49%, 13.4%, 10.78%, 10.32% and 10.15% respectively between 2000 to 2018. However, the greater values of macroeconomic condition and lower value of living standards of these countries have created a negative situation where in spite of having thriving economic condition, these countries have not yet been competent to achieve a prosperous living condition.
- Though greater investment towards the factors like Education, Fair wage distribution, Infrastructure etc. are always the crucial steps for achieving a better quality of life, still maintaining the balance between these two indicators (Q & M) will be more viable somehow, especially for the emerging nations.
- For a long-lasting growth, a country always requires a strong financial stability. In the absence of this, no types of comfort or sustainability will be achieved. So, when the countries are earning good then they definitely need to boost the social infrastructure but the growth rate of GDP should also be maintained alongside. The developing countries need to follow this more.
- Based on that theory, the value of Difference (Q – M) of Poland, Russia, Brazil and Angola, Bolivia, Malaysia can be considered as impressive. Though the former three countries have positive values and the latter three have negative, still they all are close to the stability (i.e. 0). Being the developing nations, the more they are able to achieve the balance between Macro-economic and Quality of life indicators, the heathier their overall growth could be.
- However, for the developed nation, continuous investment towards citizens’ and societies’ welfare is not that risky. The earning level of them are massively greater than that of the developing countries. Many of the developed countries currently have reached to a saturated level where for a few times they have nothing excessively bigger to achieve. They do not need to be globally recognized as economically strong nations as because they already are.
- Among the enlisted countries of table 2, Spain has the maximum CAGR of GDP between 2000 to 2018 and that is 96%. Whereas, the developing countries of table 1 have expanded in much greater rate. Countries like Qatar, Ethiopia, Angola, Kenya, Nigeria, India have risen at CAGR of 14.15%, 13.49%, 13.4%, 10.78%, 10.32%, 10.15% respectively between 2000 to 2018.
- The positive and increasing values of Difference (Q – M) of these developed nations represent their efforts towards creating heathy, comfortable and sustainable society. Hopefully, all the nations would gradually be able to build up such society.
Hence, GDP growth definitely reflect a flourishing monetary condition of a country but it is unable to show the overall growth of the economy. Irrespective of the GDP growth, governments should be aware of the quality of life provided to the citizens in order to maintain the sustainability in the society and achieve the long-term development.