How do you measure something that has no physical
dimensions? Can a child tell you he has 3 more units of love per hour
for this toy than he does for that one? Can I tell you that today's
customer service clerk is exactly twice as helpful as the one I spoke
with yesterday? Does it even make sense to use the word "measure"
when talking about something intangible?
So how would you go about quantifying an economy?
It's definitely not a simple thing to do. But it's
certainly worth it to try. Without a set of hard measurements for an
economy's size, we can't tell if one is growing or shrinking, or if
another nation's economy is larger or smaller than its neighbors.
Without one, studying economies would be a bit too subjective for most
people's taste.
So in an economic sense, what is a "big" country? When we
describe a nation's economy as "small," what are we saying?
Does a "big" economy have a lot of physical size? For
example, is it sensible to say Russia's economy is larger than
Japan's, since it just looks bigger on a map?
Well, no. When thinking about the "economic size" of a
country, geographical dimensions don't really matter directly - there
are nations with little land or resources that are still major players
in the world economy, such as Hong Kong, Taiwan or Singapore.
Ok, so how about population? Sure, population can be an
important factor in some economic issues, but not always. Some of the
world's most populated nations are pretty quiet when it comes to
economic activity or power, like Nigeria or Bangladesh.
What we're truly looking for is a measure of economic
activity itself, not a measure of size of the country in which that
activity takes place, or the number of participants in it. How big or
small is this economy when compared to that one? How big or small is
this economy compared to itself last year? Lucky for us, we have
exactly such a metric. It's called Gross Domestic Product (GDP).
GDP, is "the total dollar value of all final goods and
services produced over a specific time period." I know that
definition sounds simple enough, but there's some subtle (and a few
not so subtle) important little points in there that you should
understand before you go round town quoting GDP factoids - if your
into that sort of thing, of course…ya weirdo.
There's a couple different ways that GDP can measured, but
the most common ways are the "income approach" or the "expenditure
approach." Using either method will yield the same result.
The difference lies in whether or not you view GDP as a
measure of how many dollars were "received" in exchange for a good or
service (income approach), or how many dollars were "spent" to pay for
goods or services (expenditure approach). Every income is at someone
else's expenditure, every expenditure gives income to someone else.
Either way, GDP can be viewed just as a count of how many
dollars circulated in a country to facilitate the exchange of goods
and services in a year. Or looking it another way, how many dollars
worth of goods and services was produced, created, sold, or transacted
in a year. Same same...
Continue reading at: http://economystified.blogspot.com/2012/01/gdp.html
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