How does the GDP tell us about the health and growth of the economy?

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brettd's profile pic

brettd | High School Teacher | (Level 2) Educator Emeritus

Posted on

From another perspective, one could argue that GDP has become much less useful as an economic indicator with the advent of globalization.  As the economic boundaries between both nations and currencies have faded in recent years, the GDP's of the largest trading blocs - the European Union, North America, and China-Korea-Japan - have become more interdependent.  Our reliance on imports of energy and manufactured goods coupled with massive exports of agriculture and military hardware means that GDP fluctuates with the changing markets for these products in both directions as well as the fluctuating values of currencies associated with massive recent borrowing and recession in each of these three blocs.  As Pohnpei argues, one can see the general changes in the size of an economy over time, but world economics has simply, in my opinion, become too complex for so simple an economic measure as GDP.

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

GDP itself can't really tell us about the health and growth of the economy, but Real GDP can.

Nominal GDP isn't that useful for telling us about the health of the economy because it cannot really be compared to the GDP of previous years.  Changes in the price level make nominal GDP an inaccurate indicator of change.

The change in Real GDP, however, can tell us whether the economy is growing or not.  It can tell us whether we are truly producing goods and servics that are worth more in real dollars than we had been in a previous time period.  That is because it takes price levels into account and will not make us think we are having economic growth if all we are really having is inflation.

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

GDP (Gross Domestic Product) is a measure of economic or commercial goods and services produced in an economy. This measure is a fairly good indicator of the total size of the economy, just as the total turnover of a company is a fairly good measure of size of the company. However neither GDP is a perfect measure of the size of an economy nor total turnover a perfect measure of size of a company.

However if we accept GDP as a fairly good measure of an economy's size, changes in GDP over a period can be used as a measure of growth of an economy, and this measure of economic growth can be used as an indicator of changes in health of the economy.

The GDP is not a true measure of either size or health for two main reasons. First, GDP does not take into account non-commercial goods and services produced in an economy. Second, GDP does not take into account the population economy. For example, China is ranked, in terms of GDP, as one of the biggest economy in the world ahead of many highly developed but smaller countries. But when we look at the average prosperity of a Chinese citizen, we find that it is ranked much lower.

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