What is GDP in economics?

GDP in economics

Canvas of GDP

GDP is a
topic that everyone is interested in, but don’t get too worked up over it. What
exactly is GDP in Economics? This problem is addressed everywhere, from TV talk
programs to private meetings, by young and old, men and women, laymen and
experts, politicians, and economists, and so on. Its popularity stems from the
assumption or perception that GDP is an important metric for measuring a
country’s well-being.

جی ڈی پی ایک ایسا موضوع ہے جس میں ہر کوئی دلچسپی رکھتا ہے، لیکن اس پر زیادہ کام نہ ہو سکا۔ معاشیات میں جی ڈی پی آخر کیا ہے؟ یہ مسئلہ ہر جگہ ٹی وی ٹاک پروگراموں سے لے کر نجی ملاقاتوں تک، جوان اور بوڑھے، مرد و خواتین، عام آدمی اور ماہرین، سیاست دانوں اور ماہرین اقتصادیات وغیرہ کے لیے حل طلب ہے۔ اس کی مقبولیت اس مفروضے یا تصور سے پیدا ہوتی ہے کہ جی ڈی پی کسی ملک کی فلاح و بہبود کی پیمائش کے لیے ایک اہم پیمائش کا ذریعہ ہے۔

Politicians
argue that GDP was higher and expanding quicker during their reign than during
their opponents’. They believe that their policies and superior management have
accelerated the economy. Living standards have risen all throughout the world because of economic expansion. Modern economies, on the other hand, have
lost sight of the reality that the conventional metric of economic growth,
gross domestic product (GDP), just measures the size of a country’s economy and
does not reflect the welfare of that country. However, politicians and
economists frequently use GDP, or GDP per capita in some situations, as an
all-encompassing metric for measuring a country’s progress, combining economic
success with societal well-being. As a result, measures that promote economic
growth are perceived as positive for society.

The
COVID-19 and GDP

The COVID-19
outbreak, which began in early 2020, has had a significant impact on the global economy, particularly in developing countries. The pandemic overtook the entire
world, having a negative effect on many developed countries’ healthcare
systems. Initially, the supply shock generated by enterprises abruptly closing
around the world morphed into an unexpected demand shock, with socio-economic
ramifications. The COVID-19 epidemic imposed extraordinary limitations on
people’s travel as well as a wide range of economic and financial activity.
Tourism, travel, hotels & hospitality, transportation, and education were
all adversely damaged by supply chains and businesses.

Divergences
in the speed of recovery within and across nations, reflecting differences in
pandemic-induced disruptions and the level of governmental support, pose
substantial challenges to the global picture. Even after one and a half years
since the COVID-19 epidemic began, the global community continues to face
hurdles in terms of social and economic mitigation. Unemployment and
underemployment remained high even despite significant support and recovery that
began in mid-2020. In most nations, vaccination has begun, with the hope of
reducing the severity and frequency of illnesses in the future. So far,
coverage varies a lot, and nations are projected to reach broad vaccination at
different timeframes. New virus mutations, on the other hand, have raised
serious concerns for the global economic picture. The severity of the health
crisis, the efficacy of the vaccine against new COVID-19 strains, the
successful implementation of well-coordinated economic strategies, and the
development of financial conditions all influence the global outlook. The
variance of these drivers, as well as their relationship with country-specific
features, will determine the speed of recovery and the level of medium-term
harm.

The origins
of GDP

The modern
concept of GDP, like so many other commonplace concepts, emerged through
battle. While Simon Kuznets has often been credited with establishing GDP
(after attempting to measure US national income in 1932 to appreciate
the full scope of the Great Depression), John Maynard Keynes developed the
current idea of GDP during WWII.

In 1940, one
year into the war with Germany, Keynes, who was working in the UK Treasury at
the time, published an essay stating that economic statistics were insufficient
in determining what the British economy might generate with the existing
resources. He said that measuring Britain’s mobilization and combat capacity
was difficult due to a lack of data categories. He believes that national
income should be calculated using the sum of private consumption, investment,
and government spending. He rejected Kuznets’ version, which represented the
government’s income but not it’s spending. According to Keynes, if the
government’s wartime purchases were not factored into national income
estimates, GDP would fall even though the economy was expanding. Even
after the war, his method of calculating GDP, which included government
spending in a country’s income and was motivated by wartime needs, gained
widespread support. It is still going on in various parts of the world.

GDP in
economics as
defined in textbooks

GDP is a
measure of the size and health of our economy. GDP is the total
market value (gross) of all goods and services produced (product) by a country each year. What, however, is included in GDP? We can use the textbook
formula for measuring GDP to assist us to break down the number: 

C + I + G +
(X-M) = GDP.

C is Personal Consumption
Expenditures. (Also known as consumer expenditure, or the total of all products
and services purchased by consumers, including anything from groceries to
health insurance.)

I is Gross Private Investment. (Includes
company expenditure on fixed assets like machinery, equipment, and buildings,
as well as inventory investment; also includes house purchases by consumers.)

G is Government Purchases. (Includes
spending by the federal, state, and municipal governments on goods and services
ranging from schools and highways to national security.)

X-M is Exports minus Imports. (Or net
exports: the value of exports to other nations minus the value of imports into
the country; “the dollar value of imports is deducted to guarantee that
only domestic spending is measured in GDP.”)

The output
of the economy depends on two things,

• Factors of
  production also known as inputs
• And its
  ability to turn inputs into output, as represented by the production function.

Theoretical
View of GDP

The
production approach calculates the “value-added” at each stage of the
manufacturing process, with value-added defined as total sales less the cost of
intermediate inputs. Flour, for example, is an intermediate input with bread as
the ultimate output; similarly, architectural services are an intermediate
input with the final product being the building.

The
expenditure method sums up the value of final user purchases, such as food,
televisions, and medical services used by households; firm machinery
investments; and government and foreigner purchases of goods and services.

The income
approach sums together all of the output’s earnings, such as employee salary and
corporate operating surplus (sales less costs).

A government
agency or a national statistics agency gathers data from a range of sources on
a regular basis to calculate a country’s GDP. In their calculations, most
countries, on the other hand, adhere to internationally agreed-upon standards.
The International Monetary Fund, the European Commission, the Organization for
Economic Cooperation and Development, the United Nations, and the World Bank
created the *System of National Accounts in 1993 as the international standard
for estimating GDP.

* In 1993, the UN Statistical Division,
the International Monetary Fund, the World Bank, Eurostat, and the Organization
for Economic Cooperation and Development collaborated on the System of National
Accounts (SNA). It is designed for international use and provides a clear
structure for compiling national accounts data. However, due to the SNA’s
complexity, it might be difficult to locate explicit explanations of terminology
commonly used in national accounting. As a result, the OECD developed this
glossary, which can be used as a quick reference for the language used often in
national accounts. The OECD and other international organizations involved with
the SNA are working on a series of handbooks that will provide additional
information on various aspects of the SNA.

The volume
of an economy’s output or the actual incomes of its citizens are used to
measure its growth. The amount of gross domestic product (GDP), real gross
domestic income, and real gross national income are three viable metrics for
estimating growth according to the United Nations System of National Accounts
(2008 SNA). The sum of value created by households, government, and industries
working in the economy, evaluated at constant prices, is the volume of GDP. GDP
includes all domestic production, regardless of whether the income is
distributed to domestic or international agencies.

The state
of Pakistan’s GDP

Over the
years, Pakistan‘s economy has had a turbulent growth pattern, with recurrent
boom and bust cycles, making it difficult to achieve long-term and inclusive
growth. Long-standing structural difficulties, such as loss-making State-Owned
Enterprises (SOEs), a weak external position due to limited export capacity and
low FDI, an under-reformed energy sector, and low savings and investment, all
contributed to unsustainable economic development. In the face of these
obstacles, the current government has concentrated on an economic strategy of
achieving long-term economic growth through boosting efficiency, lowering the
cost of doing business, improving the regulatory environment, raising
productivity, and expanding investment.

Private
consumption accounts for a major portion of GDP. This high proportion indicates
that Pakistan’s economy is based on consumption. Improved consumer confidence
can have an impact on domestic production by raising demand for long-lasting
goods. Private consumption increased by 17 percent in FY2021, compared to 4
percent the previous year.

However,
growth in Public Consumption remained at 11.4 percent, down from 19.3 percent
the previous year, owing to fewer interest payments and the squeezing of
superfluous spending.

In FY2021,
Gross Fixed Capital Formation (GFCF) increased by 13.8 percent and remained at
13.6 percent of GDP. The private and governmental sectors, including the
General Government, grew by 6.6 percent and 38.1 percent, respectively, in the
GFCF.

Historically,
Net Exports’ contribution to aggregate demand has been negative. Exports of
goods and services increased by 13.6 percent in the fiscal year 2021, while imports
of goods and services increased by 20.1 percent. However, capital goods and raw
materials were the key imports this year, assisting in the rise of exports as
well as the revival of the local economy.

Pakistan’s
economy returned well in FY2021, growing at 3.94 percent, significantly higher
than the previous two years (-0.47 and 2.08 percent in FY2020 and FY2019,
respectively), and above the objective (2.1 percent for FY2021). Despite tight
fiscal limitations, the government’s timely and appropriate policy initiatives
resulted in a V-Shaped economic rebound.