Few numbers are as important for business people, investors and policymakers as GDP. It gives us a snapshot of the size of an economy and, when compared to previous data, whether it’s growing or shrinking.
But GDP doesn’t tell the whole story about how a country’s citizens are doing. Increased GDP growth doesn’t necessarily translate into increased income for the average citizen. It could mean that the richest segment of the population is getting even richer, or it could just mean that there are more goods and services being produced overall. It’s also hard to compare GDP across countries because prices differ. One can account for this by using purchasing power parity (PPP), which adjusts GDP figures to take into account the cost of living in different currencies.
Economists use GDP to measure the health of an economy, understand economic cycles and predict future growth. They monitor GDP trends and track the impact of monetary, fiscal and tax policies. They also use it to compare economies and measure the effects of trade agreements.
But GDP is not without its critics. The famous economist Simon Kuznets warned that GDP was a flawed metric because it only measured market activity and excluded many harmful activities like armaments and financial speculation and essential activities, such as caregiving by homemakers. GDP is also difficult to compare across time periods because it uses current prices, not constant ones, so increases in price reflect a rise in the value of what has been produced rather than an actual increase in the quantity of goods and services being produced.