Gross Domestic Product

Here is Philip, leaving a shop. Nice jacket! Is it new? The money Philip paid, the price, is the value of the jacket which the shop finds reasonable to charge and Philip finds reasonable to pay. So, the product, that is the jacket, has a value.

Philip continues to the hairdresser. The hairdresser cuts Philip’s hair, and Philip pays for it. The hairdresser provides a service, and the service also has a value. In our societies, goods are produced and sold all day and all night. And each product has a value.

Every car produced has a value. Every roll of toilet paper, every pencil, every jacket has a value. Meanwhile, services are carried out all the time. Hairdressers, plumbers, musicians… they all perform services and get paid. The services have a value.

You can add the values of all the goods sold and all the services carried out in a country. The result is a number called the gross domestic product, GDP. Let’s recap: The gross domestic product, GDP, is the value of all goods … and the value of all services… combined. GDP can be used to study how a country is developing economically. It is an economic welfare measurement.

In 2020, Norway had a GDP of 362 billion US dollars. This was the total value of all goods and services sold in Norway during 2020. India had, in 2020, a GDP of 2623 billion US dollars. India had a much larger GDP than Norway, and this isn’t surprising, because India has over 200 times as many inhabitants as Norway. So, comparing small countries to large ones is hard.

But there is a way: You can divide GDP by the number of inhabitants in a country. You get the measurement GDP per inhabitant, or GDP per capita. This makes it easier to compare Norway to India. In 2020, Norway’s GDP per capita was 67 000 US dollars. India’s GDP per capita was 1,900 US dollars in 2020.

The GDP per capita shows that Norway is a much richer country than India, in terms of economic welfare. You can also track GDP per capita and see how it develops over time. If GDP per capita increases from one year to the next, the country’s economy is growing. This is economic growth. Measuring growth shows us how the country is developing economically.

Growth is important. A growing GDP is important. A growing GDP means countries get money to develop their schools and hospitals, their railways and libraries, and everything else important for the people who live there. So, economic growth is important for the lives of the country’s people. But a growing economy and increasing GDP per capita do not tell the whole story about a country’s development.

Even if GDP is high, the money within the country might not be distributed evenly. There could be a big gap between rich and poor. And neither does GDP provide information about how democratic a country is. Sometimes even undemocratic countries have a high growth rate. So, development can be assessed in many ways.

GDP and GDP per capita is only one of them. It measures a part of the economic development in a country. And when Philip buys a new jacket or has his hair cut, he contributes to a growing GDP.