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Resources and where to find them:

Internet, library

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DO ACTION PLAN

EVERY DAY

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Possible problems and solutions

Problem 1: Income inequality

Solution 1: Progressive taxatation - A progressive tax system means that people who earn more money have to pay more taxes. This helps to make sure that everyone has a fair share of money. The extra money collected from higher-income people can be used to help people who don't have as much money by providing programs and services to make things more equal.

Problem 2:

Solution 2:

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World bank's share of thinking about Djibouti

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World bank's share of thinking about Djibouti

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In this article, the author analyses and discusses the effects of negative activity that slows economic growth, focusing on global inflation and the change in oil prices. They mostly talk about how they could get better. "Yet growth is expected to recover to 5.3% in 2023 and 6.2% in 2024, and opening up the digital sector for competition could lead to an additional 1% increase in national GDP by 2025, according to the latest edition of the World Bank’s Djibouti Economic Monitor." This sentence shows how they think.

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Djibouti Economy Slows Due to Global Crises, Severe Drought

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After rebounding in 2021, Djibouti's economy has slowed since the beginning of 2022 due to the war in Ukraine, global inflation, severe drought, and subdued Ethiopian demand. Yet growth is expected to recover to 5.3% in 2023 and 6.2% in 2024, and opening up the digital sector for competition could lead to an additional 1% increase in national GDP by 2025, according to the latest edition of the World Bank's Djibouti Economic Monitor.

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How has the Annual income/GNI per capita affected living standards (HDI) for people in Djibouti?

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I chose Djibouti. a place in Africa. the economy growth rate changed lately.

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Why did the economy change there, and why it is important

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Why did the economy change there, and why it is important

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Djibouti is a country in Africa that is very important to the United States. It is located in a special spot called the Horn of Africa, which is at the bottom of the Red Sea. Djibouti is a special friend to the United States because they help them with important things like keeping the area safe, making sure everything is stable, and helping people who need it. The United States has a special place called Camp Lemonnier in Djibouti, where our military stays. This place has been there since 2003, and it is the only place in Africa where the United States military stays for a long time. The war in Ukraine, global inflation, severe drought, and subdued Ethiopian demands, as the World Bank states, have affected the economy in Djibouti.

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what other countries can learn from djibouti

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what other countries can learn from djibouti

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Djibouti has natural geographical advantages due to its special place on the horn of Africa and its vast way into the Red Sea. Another thing is infrastructure development. They have made their way into railways, ports, and trade zones. also, regional cooperation. Djibouti hosts military bases for lots of countries. Renewable energy initiatives are also something that they are into. They are trying to lessen the pollution and use more renewable energy. Finally, their focus on human capital development.Djibouti knows that it's important to invest in education and help people learn new things. They have been working to make sure more people can go to school and learn useful skills. Other countries can learn from Djibouti and focus on helping people learn and grow so that they can have good jobs and make their country stronger.

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finish research question 10m

finish action plan 10m

review comment:

done with them (currently)

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Write all the RQ (15 minutes)

Write 1 resource (5 minutes)

Review Comment: I did everything

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write down two sources (20 minutes)

analyse the first source (rest of the time)

Review Comment: i wrote down 2 sources, but did not have time to analyse any

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The essential economic performance of a country is reflected by the gross domestic product, the total of all goods and services sold. Worldwide gross domestic product in 2022 was at about 12,607 USD per capita. GDP in Djibouti, on the other hand, reached USD 3,136 per capita, or 3.52 billion USD for the whole country. Djibouti is currently at number 173 among the international economies and is therefore one of the less significant.

Inflation in Djibouti in 2022 was around 5.18%. Within the EU, the average in the same year was 8.83 percent. In the United States, it was most recently 8.00%.

The index for perceived corruption in the public sector is 30, which is rather poor by global standards.

Back to overview: Djibouti

Impact of the COVID-19 pandemic

Overall, the gross domestic product in Djibouti in 2020 increased from 3.09 billion US dollars to 3.18 billion US dollars. Certainly, there have been shifts in numerous sectors of the economy, but a 3.0 percent increase has been rather unusual this year. While most countries have suffered significant losses, Djibouti has certainly held its own. The tourism sector alone slumped by around 53 percent. The unemployment rate rose from 26.3 to 28.0 percent. The country's gross debt increased by 5.6 percent. The inflation rate fell from 3.3 percent previously to 1.8 percent by the end of 2020.

Income and purchasing power

The average monthly income in Djibouti is 265 US Dollar per capita. In the USA, the figure is 6,364 US Dollar. However, the prices of consumer goods are also around 44.6 percent lower than in the USA. If you compare income and price levels, the result is a more expensive life in Djibouti than in the United States. The bottom line is that the costs do not offset the lower income, and you get about 92.5 percent less.

However, it is also important to remember that this is a purely statistical model. Both the labor output and the type and quality of the goods received always correspond to the national average on both sides of the equation - so they do not necessarily have to match. Here you can also find an international comparison of cost of living and purchasing power.

Unemployment rates in percentages 1991 - 2022

Economic performance 2022

Development of gross domestic product in millions of USD 1985 - 2022

Largest industries

Construction

Agricultural processing

Shipping

Imports and Exports 2021
Development of imports and exports in millions of USD 1991 - 2021

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Economics in Djibouti compared to the EU

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A comparison of economic indicators in Djibouti with the countries of the European Union

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GNI per capita, Atlas method (current US$)

The latest value for GNI per capita, Atlas method (current US$) in Djibouti was 3,310 as of 2020. Over the past 5 years, the value for this indicator has fluctuated between 3,310 in 2020 and 2,550 in 2015.

Definition: GNI per capita (formerly GNP per capita) is the gross national income, converted to U.S. dollars using the World Bank Atlas method, divided by the midyear population. GNI is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. GNI, calculated in national currency, is usually converted to U.S. dollars at official exchange rates for comparisons across economies, although an alternative rate is used when the official exchange rate is judged to diverge by an exceptionally large margin from the rate actually applied in international transactions. To smooth fluctuations in prices and exchange rates, a special Atlas method of conversion is used by the World Bank. This applies a conversion factor that averages the exchange rate for a given year and the two preceding years, adjusted for differences in rates of inflation between the country, and through 2000, the G-5 countries (France, Germany, Japan, the United Kingdom, and the United States). From 2001, these countries include the Euro area, Japan, the United Kingdom, and the United States.

Source: World Bank national accounts data, and OECD National Accounts data files.

See also:

GNI per capita (current LCU)

The value for GNI per capita (current LCU) in Djibouti was 591,051 as of 2020. As the graph below shows, over the past 29 years this indicator reached a maximum value of 591,051 in 2020 and a minimum value of 137,080 in 1998.

Definition: GNI per capita is gross national income divided by midyear population. GNI (formerly GNP) is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. Data are in current local currency.

Source: World Bank national accounts data, and OECD National Accounts data files.

GNI per capita (constant 2010 US$)

The latest value for GNI per capita (constant 2010 US$) in Djibouti was 2,941 as of 2018. Over the past 5 years, the value for this indicator has fluctuated between 2,941 in 2018 and 2,352 in 2013.

Definition: GNI per capita is gross national income divided by midyear population. GNI (formerly GNP) is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. Data are in constant 2010 U.S. dollars.

Source: World Bank national accounts data, and OECD National Accounts data files.

See also:

GNI per capita growth (annual %)

Definition: Annual percentage growth rate of GNI per capita based on constant local currency. Aggregates are based on constant 2010 U.S. dollars. GNI per capita is gross national income divided by midyear population. GNI (formerly GNP) is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad.

Source: World Bank national accounts data, and OECD National Accounts data files.

See also:

GNI per capita (constant LCU)

The value for GNI per capita (constant LCU) in Djibouti was 506,884 as of 2018. As the graph below shows, over the past 5 years this indicator reached a maximum value of 506,884 in 2018 and a minimum value of 405,419 in 2013.

Definition: GNI per capita is gross national income divided by midyear population. GNI (formerly GNP) is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. Data are in constant local currency.

Source: World Bank national accounts data, and OECD National Accounts data files.

GNI per capita, PPP (current international $)

The latest value for GNI per capita, PPP (current international $) in Djibouti was 5,610 as of 2020. Over the past 7 years, the value for this indicator has fluctuated between 5,610 in 2020 and 4,050 in 2013.

Definition: GNI per capita based on purchasing power parity (PPP). PPP GNI is gross national income (GNI) converted to international dollars using purchasing power parity rates. An international dollar has the same purchasing power over GNI as a U.S. dollar has in the United States. GNI is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. Data are in current international dollars based on the 2011 ICP round.

Source: World Bank, International Comparison Program database.

See also:

GNI per capita, PPP (constant 2011 international $)

The latest value for GNI per capita, PPP (constant 2011 international $) in Djibouti was 4,982 as of 2018. Over the past 5 years, the value for this indicator has fluctuated between 4,982 in 2018 and 3,984 in 2013.

Definition: GNI per capita based on purchasing power parity (PPP). PPP GNI is gross national income (GNI) converted to international dollars using purchasing power parity rates. An international dollar has the same purchasing power over GNI as a U.S. dollar has in the United States. GNI is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. Data are in constant 2011 international dollars.

Source: World Bank, International Comparison Program database.

See also:

Classification

Topic: Economic Policy & Debt Indicators

Sub-Topic: National accounts

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The latest value for GNI per capita, Atlas method (current US$) in Djibouti was 3,310 as of 2020. Over the past 5 years, the value for this indicator has fluctuated between 3,310 in 2020 and 2,550 in 2015. Definition: GNI per capita (formerly GNP per capita) is the gross national income, converted to U.S.

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Make 6+ definitions for words/acronyms that are very important for research (20 minutes)

complete problem 1 and solution 1 (10 minutes)

review comment: I did everything

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What Is Purchasing Power Parity (PPP)?

One popular macroeconomic analysis metric to compare economic productivity and standards of living between countries is purchasing power parity (PPP). PPP is an economic theory that compares different countries' currencies through a "basket of goods" approach.

According to this concept, two currencies are in equilibrium-known as the currencies being at par -when a basket of goods is priced the same in both countries, taking into account the exchange rates.

Key Takeaways

Calculating Purchasing Power Parity

Comparing Nations' Purchasing Power Parity

To make a meaningful comparison of prices across countries, a wide range of goods and services must be considered. However, this one-to-one comparison is difficult to achieve due to the sheer amount of data that must be collected and the complexity of the comparisons that must be drawn. To help facilitate this comparison, the University of Pennsylvania and the United Nations joined forces to establish the International Comparison Program (ICP) in 1968.

With this program, the PPPs generated by the ICP have a basis from a worldwide price survey that compares the prices of hundreds of various goods and services. The program helps international macroeconomists estimate global productivity and growth.

Every three years, the World Bank releases a report that compares the productivity and growth of various countries in terms of PPP and U.S. dollars. Both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) use weights based on PPP metrics to make predictions and recommend economic policy. The recommended economic policies can have an immediate short-term impact on financial markets.

Also, some forex traders use PPP to find potentially overvalued or undervalued currencies. Investors who hold stock or bonds of foreign companies may use the survey's PPP figures to predict the impact of exchange-rate fluctuations on a country's economy, and thus the impact on their investment.

Pairing Purchasing Power Parity With Gross Domestic Product

In contemporary macroeconomics, gross domestic product (GDP) refers to the total monetary value of the goods and services produced within one country. Nominal GDP calculates the monetary value in current, absolute terms. Real GDP adjusts the nominal gross domestic product for inflation.

However, some accounting goes even further, adjusting GDP for the PPP value. This adjustment attempts to convert nominal GDP into a number more easily comparable between countries with different currencies.

To better understand how GDP paired with purchase power parity works, suppose it costs $10 to buy a shirt in the U.S., and it costs €8.00 to buy an identical shirt in Germany. To make an apples-to-apples comparison, we must first convert the €8.00 into U.S. dollars. If the exchange rate was such that the shirt in Germany costs $15.00, the PPP would, therefore, be 15/10, or 1.5.

In other words, for every $1.00 spent on the shirt in the U.S., it takes $1.50 to obtain the same shirt in Germany buying it with the euro.

Drawbacks of Purchasing Power Parity

Since 1986, The Economist has playfully tracked the price of McDonald's Corp.'s (MCD) Big Mac hamburger across many countries. Their study results in the famed "Big Mac Index". In Burgernomics-a prominent 2003 paper that explores the Big Mac Index and PPP-authors Michael R. Pakko and Patricia S. Pollard cited the following factors to explain why the purchasing power parity theory is not a good reflection of reality.

Transport Costs

Goods that are unavailable locally must be imported, resulting in transport costs. These costs include not only fuel but import duties as well. Imported goods will consequently sell at a relatively higher price than do identical locally sourced goods.

Tax Differences

Government sales taxes such as the value-added tax (VAT) can spike prices in one country, relative to another.

Government Intervention

Tariffs can dramatically augment the price of imported goods, where the same products in other countries will be comparatively cheaper.

Non-Traded Services

The Big Mac's price factors input costs that are not traded. These factors include such items as insurance, utility costs, and labor costs. Therefore, those expenses are unlikely to be at parity internationally.

Market Competition

Goods might be deliberately priced higher in a country. In some cases, higher prices are because a company may have a competitive advantage over other sellers. The company may have a monopoly or be part of a cartel of companies that manipulate prices, keeping them artificially high.

The Bottom Line

While it's not a perfect measurement metric, purchase power parity does allow for the possibility of comparing pricing between countries that have differing currencies.

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One popular macroeconomic analysis metric to compare economic productivity and standards of living between countries is purchasing power parity (PPP). PPP is an economic theory that compares different countries' currencies through a "basket of goods" approach.

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What is 'Gross National Income (GNI)'

Gross national income is the sum of a nation's gross domestic product and the net income it receives from overseas.

BREAKING DOWN 'Gross National Income (GNI)'

Like gross domestic product (GDP), gross national income (GNI) is a measure of a country's income. Whereas GDP only counts income received from domestic sources, however, GNI includes net income received from abroad.

GNI is theoretically equivalent to Gross National Product (GNP), but GNP is calculated based on output rather than income. In practice there are slight discrepancies in measurement between the two, and GNI has come to be preferred to GNP, for example by the World Bank.

To calculate GNI, compensation paid to resident employees by foreign firms and income from overseas property owned by residents are added to GDP, while compensation paid by resident firms to overseas employees and income generated by foreign owners of domestic property are subtracted. Product and import taxes that are not already accounted for in GDP are also added to GNI, while subsidies are subtracted. Residence, rather than citizenship, is the criterion for determining nationality in GNI calculations, so long as the residents spend their income within the country.

Discrepancies Between GDP and GNI

For most nations there is little difference between GDP and GNI, since the difference between income received by the country versus payments made to the rest of the world tends not to be significant. For instance, the U.S.'s GNI was only about 1.5% higher than its GDP in 2016, according to the World Bank.

For some countries, however, the difference is significant: GNI can be much higher than GDP if a country receives a large amount of foreign aid, as is the case with East Timor. It can be much lower if foreigners control a large proportion of a country's production, as is the case with Ireland, a low-tax jurisdiction where the European subsidiaries of several multinational companies (nominally) reside:

Converting GDP to GNI

To convert a nation's GDP to GNI, three terms need to be added to the former: 1) net compensation receipts, 2) net property income receivable and 3) net taxes (minus subsidies) receivable on production and imports. Let's use Canada's 2010 GDP and GNI numbers to understand the reconciliation between these two measures of economic output:

GDP in 2010 = $1,624.6 million

Net compensation receipts = $0

Net property income receivable = -$28.2 million

Net taxes = $0

GNI = $1,624.6 - 28.2 = $1,596.4 million

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Gross national income is the sum of a nation's gross domestic product and the net income it receives from overseas. Like gross domestic product (GDP), gross national income (GNI) is a measure of a country's income. Whereas GDP only counts income received from domestic sources, however, GNI includes net income received from abroad.

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What Is Gross National Product (GNP)?

Gross national product (GNP) is an estimate of the total value of all the final products and services turned out in a given period by the means of production owned by a country's residents. GNP is commonly calculated by taking the sum of personal consumption expenditures, private domestic investment, government expenditure, net exports, and any income earned by residents from overseas investments, then subtracting income earned by foreign residents. Net exports represent the difference between what a country exports minus any imports of goods and services.

GNP is related to another important economic measure called gross domestic product (GDP), which takes into account all output produced within a country's borders regardless of who owns the means of production. GNP starts with GDP, adds residents' investment income from overseas investments, and subtracts foreign residents' investment income earned within a country.

Key Takeaways

Understanding Gross National Product (GNP)

GNP measures the total monetary value of the output produced by a country's residents. Therefore, any output produced by foreign residents within the country's borders must be excluded in calculations of GNP, while any output produced by the country's residents outside of its borders must be counted.

GNP does not include intermediate goods and services to avoid double-counting since they are already incorporated in the value of final goods and services.

The U.S. used GNP until 1991 as its main measure of economic activity. After that point, it started to use GDP in its place for two main reasons. First, GDP corresponds more closely to other U.S. economic data of interest to policymakers, such as employment and industrial production, which, like GDP, measure activity within the boundaries of the U.S. and ignore nationalities. Second, the switch to GDP was to facilitate cross-country comparisons because most other countries at the time primarily used GDP.

The Difference Between GNP and GDP

GNP and GDP are very closely related concepts, and the main differences between them come from the fact that there may be companies owned by foreign residents that produce goods in the country, and companies owned by domestic residents that produce goods for the rest of the world and revert earned income to domestic residents.

For example, there are a number of foreign companies that produce goods and services in the United States and transfer any income earned to their foreign residents. Likewise, many U.S. corporations produce goods and services outside of the U.S. borders and earn profits for U.S. residents. If income earned by domestic corporations outside of the United States exceeds income earned within the United States by corporations owned by foreign residents, the U.S. GNP is higher than its GDP.

Calculating both GNP and GDP can produce different results in terms of total output. For example, in 2021 (according to Q3 data), U.S. GDP was $23.2 trillion, while its GNP was $23.47 trillion.

While GDP is the most widely followed measure of a country's economic activity, GNP is still worth looking at because large differences between GNP and GDP may indicate that a country is becoming more engaged in international trade, production, or financial operations. The larger the difference between a country's GNP and GDP, the greater the degree of incomes and investment activity in that country involve transnational activities such as foreign direct investment one way or another.

What Does Gross National Product Measure?

Gross national product is one metric for measuring a nation's economic output. Gross national product is the value of all products and services produced by the citizens of a country both domestically, and internationally minus income earned by foreign residents. For instance, if a country had production facilities in a neighboring country and its home country, gross national product would account for both of these production outputs.

What Is the Difference Between Gross National Product and Gross Domestic Product?

Gross national product accounts for its citizen's productions both within and outside its borders. This figure then subtracts income earned by foreign residents within the country. By contrast, gross domestic product measures the production of goods and services made within a country's borders by both citizens and foreign residents overall.

What Is an Example of Gross National Product?

Consider a country that has a gross national product that exceeds its gross domestic product. This indicates that its citizens, businesses, and corporations are providing net inflows to the country through their overseas operations. Consequently, this higher gross national product may signal that a country is increasing its international financial operations, trade, or production.

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Gross National Product (GNP) Defined With Example

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Gross national product (GNP) includes GDP, income earned by residents from overseas investments, minus income earned by foreign residents.

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What Is Average Propensity to Consume?

Average propensity to consume (APC) measures the percentage of income that is spent rather than saved. This may be calculated by a single individual who wants to know where the money is going or by an economist who wants to track the spending and saving habits of an entire nation.

In either case, the propensity to consume can be determined by dividing average household consumption, or spending, by average household income, or earnings.

Key Takeaways

Understanding Average Propensity to Consume

From the broader economic view, a high average propensity to consume is generally good for the economy. When the average propensity to consume is high, consumers are saving less and spending more on goods or services. This increased demand drives economic growth, business expansion, and broad employment.

Low-income households are often seen as having a higher average propensity to consume than high-income households. Low-income households may be forced to spend their entire income on necessities with minimal disposable income remaining to save. Alternatively, high-income households with higher cash flow after their necessities are met typically have a relatively lower average propensity to consume.

Economists often gauge economy forecasts on actions by the middle-income households. The spending and savings patterns of this demographic often indicate a degree of confidence or pessimism about their own personal financial situations and the economy as a whole.

Propensity to Consume vs. Propensity to Save

The sum of the average propensity to consume and the average propensity to save is always equivalent to one. A household or a nation must either spend or save all of its income.

The inverse of the average propensity to consume is the average propensity to save (APS). That figure is simply the total of income minus spending. The result is known as the savings ratio.

Notably, the savings ratio is normally based on its percentage of disposable income, or after-tax income. An individual determining personal propensities to consume and save should probably use the disposable income figure as well for a more realistic measure.

Example of Average Propensity to Consume

Assume a nation's economy has a gross domestic product (GDP) equivalent to its disposable income of $500 billion for the previous year. The total savings of the economy was $300 billion, and the rest was spent on goods and services.

The nation's APS is calculated to be 0.60, or $300 billion/$500 billion. This indicates the economy allocated 60% of its disposable income to savings. The average propensity to consume is calculated to be 0.40, or (1 - 0.60). Therefore, the nation spent 40% of its GDP on goods and services.

APS can include saving for retirement, a home purchase, and other long-term investments. As such, it can be a proxy for national financial health.

Special Considerations

The marginal propensity to consume (MPC) is a related concept. It measures the change in the average propensity to consume.

Assume that the nation in the previous example increased its GDP to $700 billion and its consumption of goods and services rose to $375 billion. The economy's average propensity to consume increased to 53.57%.

The nation's consumption increased from $200 billion to $375 billion. Alternatively, the nation's GDP increased from $500 billion to $700 billion. The nation's marginal propensity to consume is 87.5% ($375 billion - $200 billion) / ($700 billion - $500 billion). The marginal propensity measures the directional trend of how an entity is utilizing its money. In this case, 87.5% of new growth was further consumed.

What Is Average Propensity to Consume?

Average propensity to consume is an economic indicator of how much income is spent. A specific entity is selected such as an individual, an income class, or an entire country. Average propensity to consume measures how much money is saved compared to spent.

Average propensity to consume is used by economists to forecast future economic growth. When average propensity to consume is higher, more people are spending more money. This drives economic growth through product demand and job creation.

How Is Average Propensity to Consume Measured?

Average propensity to consume may be reported as a percent (60% of income is consumed) or as a decimal (average consumption is 0.6). Average propensity to consume is also generally most useful when compared against itself over time or across entities. For example, the average propensity to consume for a United States citizen could be tracked over time or compared against Canadian citizens.

How Do I Calculate Average Propensity to Consume?

Average propensity to consume is calculated by dividing an entity's consumption by the entity's total income. It is a ratio between what is spent and what is earned.

What Does Average Propensity to Consume Mean?

Average propensity to consume is an economic measurement of how much income a specific entity spends. That entity may be an individual or a country. If an entity has a higher average propensity to consume, it means a higher proportion of their income is used to buy things as opposed to save for the future.

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Average Propensity to Consumer (APC) Meaning & Example

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Average propensity to consume measures the percentage of income that a person or an entire nation spends rather than saving or investing.

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What Is the Average Propensity To Save? (APS)

The average propensity to save (APS) is a macroeconomic term that refers to the proportion of income that is saved rather than spent on current goods and services. Also known as the savings ratio, it is usually expressed as a percentage of total household disposable income (income minus taxes).

The inverse of APS is the average propensity to consume (APC). APS is also related to the marginal propensity to save (MPS), which expresses the proportion of a change in income that is saved rather than consumed.

Understanding the Average Propensity To Save (APS)

The APS is an important economic indicator for a population. From a personal finance perspective, the current savings rate of a population can be linked to behaviors, such as saving for retirement, which affect the well-being of a population as it ages. Economically, savings are intimately linked with the health of the economy because they represent the choice to forgo current consumption in favor of future consumption, which frees up the real economic resources that are necessary to engage in productive investment and produce capital goods.

The higher the APS of a society, the more the people in that society value investing in the future over consuming in the present. Investment in productive capital goods is the direct driver of sustainable economic growth.

Factors Influencing the Average Propensity To Save (APS)

Individual savings rates are driven mostly by individual time preference, so factors that influence individual time preference will tend to drive APS. A society's APS is the average saving rate across all individuals, which will also depend on population-level characteristics.

Inflation and Interest Rates

Factors that make individuals want to spend more now can also influence a population's APS, such as the rate of inflation and current interest rates. If inflation is high, prices are expected to rise in the future. People will spend their money now and make purchases in the present day that they may have otherwise delayed in order to get a better price. If they wait, prices may have risen.

Low interest rates will also encourage people to make purchases now, as they are not being incentivized to save due to the low interest rates being paid. Conversely, a low inflation/ deflationary environment and high interest rate environment will encourage saving and the delay of purchases.

Demographic Factors

A population's APS can be affected by demographic factors such as the distribution of people of various ages in the region.

Most people's income and consumption vary over the course of their lives. Children and younger adults consume resources but have not yet matured to reach their productive capacity. Middle-aged people who are in the wealth accumulation phase of their life should be saving their money for large purchases such as houses and for retirement. Older people, once they pass through their most productive years, usually begin spending down the savings they have accumulated, and will at some point begin to consume more than they produce.

A population with a low APS might have a large percentage of older people who are retired or past their most productive years, or a high percentage of children and young people who are not yet in the workforce or still building their productive capacity.

Calculating the Average Propensity to Save (APS)

APS is calculated by dividing total savings by income level. Usually, disposable (after-tax) income is used.

For example, if the income level is 100 and total savings for that level is 30, then APS is 30/100 or 0.3. APS can never be 1 or greater than 1. That said, APS can have a negative value if income is zero and consumption has a positive value. For example, if income is 0 and consumption is 30, then the APS value will be -0.3.

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Average Propensity To Save (APS): Definition & Formula

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Average propensity to save (APS) is an economic term for the proportion of income that is saved rather than spent on current goods and services.

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What is 'Aggregate Demand'

Aggregate demand is an economic measurement of the sum of all final goods and services produced in an economy, expressed as the total amount of money exchanged for those goods and services. Since aggregate demand is measured by market values, it only represents total output at a given price level and does not necessarily represent quality or standard of living.

BREAKING DOWN 'Aggregate Demand'

As a macroeconomic term describing the total demand in an economy for all goods and services at any given price level in a given period, aggregate demand necessarily equals gross domestic product (GDP), at least in purely quantitative terms, because the two share the same equation. As a matter of accounting, it must always be the case that the aggregate demand and GDP increase or decrease together.

Technically speaking, aggregate demand only equals GDP in the long run after adjusting for the price level. This is because short-run aggregate demand measures total output for a single nominal price level, not necessarily (and in fact rarely) equilibrium. In nearly all models, however, the price level is assumed to be "one" for simplicity. Other variations in calculations can occur depending on methodological variations or timing issues in gathering statistics.

Aggregate demand is by its very nature general, not specific. All consumer goods, capital goods, exports, imports and government spending programs are considered equal so long as they traded at the same market value.

Calculating Aggregate Demand

The Keynesian equation for aggregate demand is: AD = C + I + G + Nx

Where:

C = Consumer spending on goods and services

I = Private investment and corporate spending for non-final capital goods (factories, equipment, etc.)

G = Government spending for public goods and social services (infrastructure, Medicare, etc.)

Nx = Net exports (exports minus imports)

This is the same formula used by the Bureau of Economic Analysis to measure GDP.

Illustrating Aggregate Demand

If you were to represent aggregate demand graphically, the aggregate amount of goods and services demanded is represented on the horizontal X-axis, and the overall price level of the entire basket of goods and services is represented on the vertical Y-axis.

The aggregate demand curve, like most typical demand curves, slopes downward from left to right. Demand increases or decreases along the curve as prices for goods and services either increase or decrease. Also, the curve can shift due to changes in the money supply, or increases and decreases in tax rates.

Factors That Can Affect the Aggregate Demand Curve

The following are some of the key economic factors that can affect the aggregate demand curve:

Currency exchange rate changes: If the value of the U.S. dollar falls (or rises), foreign goods will become more (or less expensive). Meanwhile, goods manufactured in the U.S. will become cheaper (or more expensive) for foreign markets. Aggregate demand will, therefore, increase (or decrease).

Changes in real interest rates: This will affect decisions made by consumers and businesses when it comes to capital goods. Lower real interest rates will lower large items (such as vehicles and homes), and business capital project spending will increase - making the aggregate demand curve shift down and to the right. Higher real interest rates will raise the costs of goods and project spending, making the curve shift up and to the left.

Wealth: Should the wealth of a household increase (or decrease), demand will also increase (or decrease).

Changes in inflation expectation: Should consumers feel that inflation will increase, later on, they may tend to make purchases now, which means the aggregate demand will rise. But if consumers believe prices will drop in the future, aggregate demand will then drop at present, with the curve shifting up and to the left.

Aggregate Demand Controversy

Boosting aggregate demand also boosts the size of the economy regarding measured GDP. However, this does not prove that an increase in aggregate demand creates economic growth. Since GDP and aggregate demand share the same calculation, it only echoes that they increase concurrently. The equation does not show which is the cause and which is the effect.

And this is the subject of major debates in economic theory.

Early economic theories hypothesized that production is the source of demand. The 18th-century French classical liberal economist Jean-Baptiste Say stated that consumption is limited to productive capacity and that social demands are essentially limitless, a theory referred to as Say's law.

Say's law ruled until the 1930s, with the advent of the theories of British economist John Maynard Keynes. Keynes, by arguing that demand drives supply, placed total demand in the driver's seat. Keynesian macroeconomists have since believed that stimulating aggregate demand will increase real future output. According to their demand-side theory, the total level of output in the economy is driven by the demand for goods and services and propelled by money spent on those goods and services. In other words, producers look to rising levels of spending as an indication to increase production.

Keynes considered unemployment to be a byproduct of insufficient aggregate demand because wage levels would not adjust downward fast enough to compensate for reduced spending. He believed the government could spend money and increase aggregate demand until idle economic resources, including laborers, were redeployed.

Other schools of thought, notably the Austrian School and real business cycle theorists, hearken back to Say. They stress consumption is only possible after production. This means an increase in output drives an increase in consumption, not the other way around. Any attempt to increase spending rather than sustainable production only causes maldistributions of wealth or higher prices, or both.

Keynes further argued that individuals can end up damaging production by limiting current expenditures - say, by hoarding money. Other economists argue that hoarding changes prices but does not necessarily change capital accumulation, production or future output. In other words, the effect of an individual's saving money - more capital available for business - does not disappear on account of lack of spending.

Aggregation Problem

Another issue rests with the use of aggregate data in macroeconomics. Aggregate demand measures many different economic transactions between millions of individuals and for different purposes. This makes it very difficult for variations, run regressions or accurately identify collinearity and causality. In statistics, this is referred to as the "aggregation problem" or "ecological inference fallacy."

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Aggregate demand is an economic measurement of the sum of all final goods and services produced in an economy, expressed as the total amount of money exchanged for those goods and services. Since aggregate demand is measured by market values, it only represents total output at a given price level and does not necessarily represent quality or standard of living.

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What Is Aggregate Supply?

Aggregate supply, also known as total output, is the total supply of goods and services produced within an economy at a given overall price in a given period. It is represented by the aggregate supply curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Typically, there is a positive relationship between aggregate supply and the price level.

Aggregate Supply Explained

Rising prices are typically an indicator that businesses should expand production to meet a higher level of aggregate demand. When demand increases amid constant supply, consumers compete for the goods available and, therefore, pay higher prices. This dynamic induces firms to increase output to sell more goods. The resulting supply increase causes prices to normalize and output to remain elevated.

Key Takeaways

Changes in Aggregate Supply

A shift in aggregate supply can be attributed to many variables, including changes in the size and quality of labor, technological innovations, an increase in wages, an increase in production costs, changes in producer taxes, and subsidies and changes in inflation. Some of these factors lead to positive changes in aggregate supply while others cause aggregate supply to decline. For example, increased labor efficiency, perhaps through outsourcing or automation, raises supply output by decreasing the labor cost per unit of supply. By contrast, wage increases place downward pressure on aggregate supply by increasing production costs.

Aggregate Supply Over the Short and Long Run

In the short run, aggregate supply responds to higher demand (and prices) by increasing the use of current inputs in the production process. In the short run, the level of capital is fixed, and a company cannot, for example, erect a new factory or introduce a new technology to increase production efficiency. Instead, the company ramps up supply by getting more out of its existing factors of production, such as assigning workers more hours or increasing the use of existing technology.

In the long run, however, aggregate supply is not affected by the price level and is driven only by improvements in productivity and efficiency. Such improvements include increases in the level of skill and education among workers, technological advancements, and increases in capital. Certain economic viewpoints, such as the Keynesian theory, assert that long-run aggregate supply is still price elastic up to a certain point. Once this point is reached, supply becomes insensitive to changes in price.

Example of Aggregate Supply

XYZ Corporation produces 100,000 widgets per quarter at a total expense of $1 million, but the cost of a critical component that accounts for 10% of that expense doubles in price because of a shortage of materials or other external factors. In that event, XYZ Corporation could produce only 90,909 widgets if it is still spending $1 million on production. This reduction would represent a decrease in aggregate supply. In this example, the lower aggregate supply could lead to demand exceeding output. That, coupled with the increase in production costs, is likely to lead to a rise in price.

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Aggregate supply, also known as total output, is the total supply of goods and services produced within an economy at a given overall price in a given period. It is represented by the aggregate supply curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide.

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What Is Gross Domestic Product (GDP)?

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country's economic health.

Though GDP is typically calculated on an annual basis, it is sometimes calculated on a quarterly basis as well. In the U.S., for example, the government releases an annualized GDP estimate for each fiscal quarter and also for the calendar year. The individual data sets included in this report are given in real terms, so the data is adjusted for price changes and is, therefore, net of inflation.

Understanding Gross Domestic Product (GDP)

The calculation of a country's GDP encompasses all private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs, and the foreign balance of trade. (Exports are added to the value and imports are subtracted).

Of all the components that make up a country's GDP, the foreign balance of trade is especially important. The GDP of a country tends to increase when the total value of goods and services that domestic producers sell to foreign countries exceeds the total value of foreign goods and services that domestic consumers buy. When this situation occurs, a country is said to have a trade surplus.

If the opposite situation occurs-if the amount that domestic consumers spend on foreign products is greater than the total sum of what domestic producers are able to sell to foreign consumers-it is called a trade deficit. In this situation, the GDP of a country tends to decrease.

GDP can be computed on a nominal basis or a real basis, the latter accounting for inflation. Overall, real GDP is a better method for expressing long-term national economic performance since it uses constant dollars.

Let's say one country had a nominal GDP of $100 billion in 2012. By 2022, its nominal GDP grew to $150 billion. Prices also rose by 100% over the same period. In this example, if you looked solely at its nominal GDP, the country's economy appears to be performing well. However, the real GDP (expressed in 2012 dollars) would only be $75 billion, revealing that an overall decline in real economic performance actually occurred during this time.

Types of Gross Domestic Product

GDP can be reported in several ways, each of which provides slightly different information.

Nominal GDP

Nominal GDP is an assessment of economic production in an economy that includes current prices in its calculation. In other words, it doesn't strip out inflation or the pace of rising prices, which can inflate the growth figure.

All goods and services counted in nominal GDP are valued at the prices that those goods and services are actually sold for in that year. Nominal GDP is evaluated in either the local currency or U.S. dollars at currency market exchange rates to compare countries' GDPs in purely financial terms.

Nominal GDP is used when comparing different quarters of output within the same year. When comparing the GDP of two or more years, real GDP is used. This is because, in effect, the removal of the influence of inflation allows the comparison of the different years to focus solely on volume.

Real GDP is an inflation-adjusted measure that reflects the number of goods and services produced by an economy in a given year, with prices held constant from year to year to separate out the impact of inflation or deflation from the trend in output over time. Since GDP is based on the monetary value of goods and services, it is subject to inflation.

Rising prices tend to increase a country's GDP, but this does not necessarily reflect any change in the quantity or quality of goods and services produced. Thus, by looking just at an economy's nominal GDP, it can be difficult to tell whether the figure has risen because of a real expansion in production or simply because prices rose.

Economists use a process that adjusts for inflation to arrive at an economy's real GDP. By adjusting the output in any given year for the price levels that prevailed in a reference year, called the base year, economists can adjust for inflation's impact. This way, it is possible to compare a country's GDP from one year to another and see if there is any real growth.

Real GDP is calculated using a GDP price deflator, which is the difference in prices between the current year and the base year. For example, if prices rose by 5% since the base year, then the deflator would be 1.05. Nominal GDP is divided by this deflator, yielding real GDP. Nominal GDP is usually higher than real GDP because inflation is typically a positive number.

Real GDP accounts for changes in market value and thus narrows the difference between output figures from year to year. If there is a large discrepancy between a nation's real GDP and nominal GDP, this may be an indicator of significant inflation or deflation in its economy.

GDP Per Capita

GDP per capita is a measurement of the GDP per person in a country's population. It indicates that the amount of output or income per person in an economy can indicate average productivity or average living standards. GDP per capita can be stated in nominal, real (inflation-adjusted), or PPP (purchasing power parity) terms.

At a basic interpretation, per-capita GDP shows how much economic production value can be attributed to each individual citizen. This also translates to a measure of overall national wealth since GDP market value per person also readily serves as a prosperity measure.

Per-capita GDP is often analyzed alongside more traditional measures of GDP. Economists use this metric for insight into their own country's domestic productivity and the productivity of other countries. Per-capita GDP considers both a country's GDP and its population. Therefore, it can be important to understand how each factor contributes to the overall result and is affecting per-capita GDP growth.

If a country's per-capita GDP is growing with a stable population level, for example, it could be the result of technological progressions that are producing more with the same population level. Some countries may have a high per-capita GDP but a small population, which usually means they have built up a self-sufficient economy based on an abundance of special resources.

GDP Growth Rate

The GDP growth rate compares the year-over-year (or quarterly) change in a country's economic output to measure how fast an economy is growing. Usually expressed as a percentage rate, this measure is popular for economic policymakers because GDP growth is thought to be closely connected to key policy targets such as inflation and unemployment rates.

If GDP growth rates accelerate, it may be a signal that the economy is overheating and the central bank may seek to raise interest rates. Conversely, central banks see a shrinking (or negative) GDP growth rate (i.e., a recession) as a signal that rates should be lowered and that stimulus may be necessary.

GDP Purchasing Power Parity (PPP)

While not directly a measure of GDP, economists look at purchasing power parity (PPP) to see how one country's GDP measures up in international dollars using a method that adjusts for differences in local prices and costs of living to make cross-country comparisons of real output, real income, and living standards.

GDP Formula

GDP can be determined via three primary methods. All three methods should yield the same figure when correctly calculated. These three approaches are often termed the expenditure approach, the output (or production) approach, and the income approach.

The Expenditure Approach

The expenditure approach, also known as the spending approach, calculates spending by the different groups that participate in the economy. The U.S. GDP is primarily measured based on the expenditure approach. This approach can be calculated using the following formula:

GDP = C + G + I + NX

where

C = consumption;

G = government spending;

I = investment; and

NX = net exports

All of these activities contribute to the GDP of a country. Consumption refers to private consumption expenditures or consumer spending. Consumers spend money to acquire goods and services, such as groceries and haircuts. Consumer spending is the biggest component of GDP, accounting for more than two-thirds of the U.S. GDP.

Consumer confidence, therefore, has a very significant bearing on economic growth. A high confidence level indicates that consumers are willing to spend, while a low confidence level reflects uncertainty about the future and an unwillingness to spend.

Government spending represents government consumption expenditure and gross investment. Governments spend money on equipment, infrastructure, and payroll. Government spending may become more important relative to other components of a country's GDP when consumer spending and business investment both decline sharply. (This may occur in the wake of a recession, for example.)

Investment refers to private domestic investment or capital expenditures. Businesses spend money to invest in their business activities. For example, a business may buy machinery. Business investment is a critical component of GDP since it increases the productive capacity of an economy and boosts employment levels.

The net exports formula subtracts total exports from total imports (NX = Exports - Imports). The goods and services that an economy makes that are exported to other countries, less the imports that are purchased by domestic consumers, represent a country's net exports. All expenditures by companies located in a given country, even if they are foreign companies, are included in this calculation.

The Production (Output) Approach

The production approach is essentially the reverse of the expenditure approach. Instead of measuring the input costs that contribute to economic activity, the production approach estimates the total value of economic output and deducts the cost of intermediate goods that are consumed in the process (like those of materials and services). Whereas the expenditure approach projects forward from costs, the production approach looks backward from the vantage point of a state of completed economic activity.

The Income Approach

The income approach represents a kind of middle ground between the two other approaches to calculating GDP. The income approach calculates the income earned by all the factors of production in an economy, including the wages paid to labor, the rent earned by land, the return on capital in the form of interest, and corporate profits.

The income approach factors in some adjustments for those items that are not considered payments made to factors of production. For one, there are some taxes-such as sales taxes and property taxes-that are classified as indirect business taxes. In addition, depreciation -a reserve that businesses set aside to account for the replacement of equipment that tends to wear down with use-is also added to the national income. All of this together constitutes a nation's income.

GDP vs. GNP vs. GNI

Although GDP is a widely used metric, there are other ways of measuring the economic growth of a country. While GDP measures the economic activity within the physical borders of a country (whether the producers are native to that country or foreign-owned entities), gross national product (GNP) is a measurement of the overall production of people or corporations native to a country, including those based abroad. GNP excludes domestic production by foreigners.

Gross national income (GNI) is another measure of economic growth. It is the sum of all incomeearned by citizens or nationals of a country (regardless of whether the underlying economic activity takes place domestically or abroad). The relationship between GNP and GNI is similar to the relationship between the production (output) approach and the income approach used to calculate GDP.

GNP uses the production approach, while GNI uses the income approach. With GNI, the income of a country is calculated as its domestic income, plus its indirect business taxes and depreciation (as well as its net foreign factor income). The figure for net foreign factor income is calculated by subtracting all payments made to foreign companies and individuals from all payments made to domestic businesses.

In an increasingly global economy, GNI has been put forward as a potentially better metric for overall economic health than GDP. Because certain countries have most of their income withdrawn abroad by foreign corporations and individuals, their GDP figure is much higher than the figure that represents their GNI.

For example, in 2019, Luxembourg had a significant difference between its GDP and GNI, mainly due to large payments made to the rest of the world via foreign corporations that did business in Luxembourg, attracted by the tiny nation's favorable tax laws. On the contrary, in the U.S., GNI and GDP do not differ substantially. U.S. GDP was $24.9 trillion as of Q2-2022 while its GNI was $23.4 trillion at the end of 2021.

Adjustments to GDP

A number of adjustments can be made to a country's GDP to improve the usefulness of this figure. For economists, a country's GDP reveals the size of the economy but provides little information about the standard of living in that country. Part of the reason for this is that population size and cost of living are not consistent around the world.

For example, comparing the nominal GDP of China to the nominal GDP of Ireland would not provide much meaningful information about the realities of living in those countries because China has approximately 300 times the population of Ireland.

To help solve this problem, statisticians sometimes compare GDP per capita between countries. GDP per capita is calculated by dividing a country's total GDP by its population, and this figure is frequently cited to assess the nation's standard of living. Even so, the measure is still imperfect.

Suppose China has a GDP per capita of $1,500, while Ireland has a GDP per capita of $15,000. This doesn't necessarily mean that the average Irish person is 10 times better off than the average Chinese person. GDP per capita doesn't account for how expensive it is to live in a country.

PPP attempts to solve this problem by comparing how many goods and services an exchange-rate-adjusted unit of money can purchase in different countries-comparing the price of an item, or basket of items, in two countries after adjusting for the exchange rate between the two, in effect.

Real per-capita GDP, adjusted for purchasing power parity, is a heavily refined statistic to measure true income, which is an important element of well-being. An individual in Ireland might make $100,000 a year, while an individual in China might make $50,000 a year. In nominal terms, the worker in Ireland is better off. But if a year's worth of food, clothing, and other items costs three times as much in Ireland as in China, however, then the worker in China has a higher real income.

How to Use GDP Data

Most nations release GDP data every month and quarter. In the U.S., the Bureau of Economic Analysis (BEA) publishes an advance release of quarterly GDP four weeks after the quarter ends, and a final release three months after the quarter ends. The BEA releases are exhaustive and contain a wealth of detail, enabling economists and investors to obtain information and insights on various aspects of the economy.

GDP's market impact is generally limited, since it is backward-looking, and a substantial amount of time has already elapsed between the quarter-end and GDP data release. However, GDP data can have an impact on markets if the actual numbers differ considerably from expectations.

Because GDP provides a direct indication of the health and growth of the economy, businesses can use GDP as a guide to their business strategy. Government entities, such as the Fed in the U.S., use the growth rate and other GDP stats as part of their decision process in determining what type of monetary policies to implement.

If the growth rate is slowing, they might implement an expansionary monetary policy to try to boost the economy. If the growth rate is robust, they might use monetary policy to slow things down to try to ward off inflation.

Real GDP is the indicator that says the most about the health of the economy. It is widely followed and discussed by economists, analysts, investors, and policymakers. The advance release of the latest data will almost always move markets, although that impact can be limited, as noted above.

GDP and Investing

Investors watch GDP since it provides a framework for decision-making. The corporate profits and inventory data in the GDP report are a great resource for equity investors, as both categories show total growth during the period; corporate profits data also displays pre-tax profits, operating cash flows, and breakdowns for all major sectors of the economy.

Comparing the GDP growth rates of different countries can play a part in asset allocation, aiding decisions about whether to invest in fast-growing economies abroad-and if so, which ones.

One interesting metric that investors can use to get some sense of the valuation of an equity market is the ratio of total market capitalization to GDP, expressed as a percentage. The closest equivalent to this in terms of stock valuation is a company's market cap to total sales (or revenues), which in per-share terms is the well-known price-to-sales ratio.

Just as stocks in different sectors trade at widely divergent price-to-sales ratios, different nations trade at market-cap-to-GDP ratios that are literally all over the map. For example, according to the World Bank, the U.S. had a market-cap-to-GDP ratio of 195% for 2020, while China had a ratio of just over 83% and Hong Kong had a ratio of 1,769%.

However, the utility of this ratio lies in comparing it to historical norms for a particular nation. As an example, the U.S. had a market-cap-to-GDP ratio of 142% at the end of 2006, which dropped to 79% by the end of 2008. In retrospect, these represented zones of substantial overvaluation and undervaluation, respectively, for U.S. equities.

The biggest downside of this data is its lack of timeliness; investors only get one update per quarter, and revisions can be large enough to significantly alter the percentage change in GDP.

History of GDP

The concept of GDP was first proposed in 1937 in a report to the U.S. Congress in response to the Great Depression, conceived of and presented by an economist at the National Bureau of Economic Research (NBER), Simon Kuznets.

At the time, the preeminent system of measurement was GNP. After the Bretton Woods conference in 1944, GDP was widely adopted as the standard means for measuring national economies; however, the U.S. continued to use GNP as its official measure of economic welfare until 1991, after which it switched to GDP.

Beginning in the 1950s, however, some economists and policymakers began to question GDP. Some observed, for example, a tendency to accept GDP as an absolute indicator of a nation's failure or success, despite its failure to account for health, happiness, (in)equality, and other constituent factors of public welfare. In other words, these critics drew attention to a distinction between economic progress and social progress.

However, most authorities, like Arthur Okun, an economist for President John F. Kennedy's Council of Economic Advisers, held firm to the belief that GDP is an absolute indicator of economic success, claiming that for every increase in GDP, there would be a corresponding drop in unemployment.

Criticisms of GDP

There are, of course, drawbacks to using GDP as an indicator. In addition to the lack of timeliness, some criticisms of GDP as a measure are:

It ignores the value of informal or unrecorded economic activity. GDP relies on recorded transactions and official data, so it does not take into account the extent of informal economic activity. GDP fails to account for the value of under-the-table employment, underground market activity, or unremunerated volunteer work, which can all be significant in some nations and cannot account for the value of leisure time or household production, which are ubiquitous conditions of human life in all societies.

It is geographically limited in a globally open economy. GDP does not take into account profits earned in a nation by overseas companies that are remitted back to foreign investors. This can overstate a country's actual economic output. For example, Ireland had a GDP of $426 billion and GNI of $324 billion in 2020, the difference of approximately $100 billion (or over 20% of GDP) largely being due to profit repatriation by foreign companies based in Ireland.

It emphasizes material output without considering overall well-being. GDP growth alone cannot measure a nation's development or its citizens' well-being, as noted above. For instance, a nation may be experiencing rapid GDP growth, but this may impose a significant cost to society in terms of environmental impact and an increase in income disparity.

It ignores business-to-business activity. GDP considers only final goods production and new capital investment and deliberately nets out intermediate spending and transactions between businesses. By doing so, GDP overstates the importance of consumption relative to production in the economy and is less sensitive as an indicator of economic fluctuations compared to metrics that include business-to-business activity.

It counts costs and waste as economic benefits. GDP counts all final private and government spending as additions to income and output for society, regardless of whether they are actually productive or profitable. This means that obviously unproductive or even destructive activities are routinely counted as economic output and contribute to growth in GDP. For example, this includes spending directed toward extracting or transferring wealth between members of society rather than producing wealth (such as the administrative costs of taxation or money spent on lobbying and rent-seeking); spending on investment projects for which the necessary complementary goods and labor are not available or for which actual consumer demand does not exist (such as the construction of empty ghost cities or bridges to nowhere, unconnected to any road network); and spending on goods and services that are either themselves destructive or only necessary to offset other destructive activities, rather than to create new wealth (such as the production of weapons of war or spending on policing and anti-crime measures).

Global Sources for Country GDP Data

The World Bank hosts one of the most reliable web-based databases. It has one of the best and most comprehensive lists of countries for which it tracks GDP data. The International Money Fund (IMF) also provides GDP data through its multiple databases, such as World Economic Outlook and International Financial Statistics.

Another highly reliable source of GDP data is the Organization for Economic Cooperation and Development (OECD). The OECD not only provides historical data but also forecasts GDP growth. The disadvantage of using the OECD database is that it tracks only OECD member countries and a few nonmember countries.

In the U.S., the Fed collects data from multiple sources, including a country's statistical agencies and The World Bank. The only drawback to using a Fed database is a lack of updating in GDP data and an absence of data for certain countries.

The BEA is a division of the U.S. Department of Commerce. It issues its own analysis document with each GDP release, which is a great investor tool for analyzing figures and trends and reading highlights of the very lengthy full release.

What Is a Simple Definition of GDP?

Which Country Has the Highest GDP?

Is a High GDP Good?

The Bottom Line

In their seminal textbook Economics, Paul Samuelson and William Nordhaus neatly sum up the importance of the national accounts and GDP. They liken the ability of GDP to give an overall picture of the state of the economy to that of a satellite in space that can survey the weather across an entire continent.

GDP enables policymakers and central banks to judge whether the economy is contracting or expanding, whether it needs a boost or restraint, and if a threat such as a recession or inflation looms on the horizon. Like any measure, GDP has its imperfections. In recent decades, governments have created various nuanced modifications in attempts to increase GDP accuracy and specificity. Means of calculating GDP have also evolved continually since its conception to keep up with evolving measurements of industry activity and the generation and consumption of new, emerging forms of intangible assets.

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Gross Domestic Product (GDP): Formula and How to Use It

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Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country's economic health.

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