GDP: The Health Diagnosis of Economies
May 2025 | By Yi Chen Choo
Ever heard of people talking about "the economy" growing or shrinking? It sounds complicated, but it's actually not so much. One of the key ways we track this is through something called Gross Domestic Product, or GDP. Think of GDP as the economy's "health” as it tells us how well the economy is performing. But what exactly is it measuring, and why should you care?
Gross Domestic Product (GDP) is the total monetary value of all the final goods and services produced within a country's borders during a specific period.
Let's break down what this means:
"Monetary Value": We add everything up using its price in the local currency (like Rupiah here in Indonesia, or Dollars in the US).
"Final Goods and Services": This is important. GDP only counts the final product, not the parts used to make it. For example, it counts the value of a car, not the value of the parts of the car separately. This avoids double-counting as that wouldn’t be an accurate measure of a country's output (which is the point of GDP).
"Within a Country's Borders": GDP measures production happening geographically inside the country, no matter of who owns the company. So, a Toyota (a Japanese car brand) made in Indonesia counts towards Indonesia's GDP, not Japan’s.
How Do We Calculate GDP?
Imagine trying to add up every single thing produced! Of course, economists don’t monitor what every single person buys at supermarkets or count the amount of people who paid for train rides today. That’s like Mr. Campbell (our academic co-principle) university counseling every student. Instead, counselors exist to help divide work to account for every student. Similarly, economists have the Expenditure Approach which sums up all spending.
Consumption (C): This is the largest piece of GDP. It’s all the spending consumers like us do daily. It's everything households like yours spend money on like your mom’s groceries, movie tickets, clothes, tuition fees, etc.
Investment (I): In GDP terms, investment means businesses spending on new equipment, buildings, and factories. Think about JIS, the highschool library was an amazing addition to our campus (fun fact: it was completed in 2021). In order to construct it, JIS needed to “invest” in new infrastructure which contributes to the “I” portion of GDP. Investment is important as it builds the foundation for future production or in the case of the JIS highschool library, it builds a foundation for better learning environments for us students.
Government Spending (G): This covers all the money the government spends on public services like building roads, schools, paying teachers, and funding national defense.
Net Exports (NX): This is the value of a country's exports (goods and services sold abroad) minus the value of its imports (goods and services bought from abroad). If exports are greater than imports, NX is positive (a trade surplus). If imports are greater, NX is negative (a trade deficit), which subtracts from GDP.
The formula is simple: GDP = C + I + G + (X - M) (where X is Exports and M is Imports).
Why does GDP matter?
GDP is the most widely used indicator of a country's economic health and size. Why is this the case?
Comparing GDP from one period to the next tells us if the economy is expanding, contracting, or staying flat. Consistent growth is generally associated with rising living standards.
With this information on the economy’s growth through GDP, governments can use it to guide economic policies to adjust GDP to their liking. Back to the “health” analogy, think of the government and economists creating policies as the doctors of an economy who adjust their treatments (policies) based upon the economy’s health (GDP).
GDP not only tells us how much growth there is in an economy over a specific time, it also indicates unemployment rates. Growing economies usually needs more workers. This makes sense because as GDP grows in an economy, more is being produced. Increased production requires companies to hire more workers to accommodate the increased production. Rising GDP often correlates with lower unemployment rates as businesses hire more people to meet increased demand. On the other hand, falling GDP often leads to job losses which increases unemployment.
GDP allows us to compare the economic size of different countries. We often use GDP per capita (GDP divided by population) for a better sense of average income since GDP alone is very dependent on the size of an economy’s population.
Why GDP isn’t perfect:
While GDP is useful or arguably the most useful economic indicator, GDP has limitations. It doesn't show us the full picture of everything that contributes to economic well-being:
Due to how GDP is measured, sometimes it doesn’t capture all output in an economy. For example, if farmers who grows lettuce and tomatoes sell all his tomatoes to the local market but keeps the lettuce to use himself, although the lettuce is new output in an economy which should be accounted for when measuring GDP, it's never recorded as consumption as it is never bought by other consumers making it impossible for it to be recorded. This is called Non-Market Activities.
Additionally, GDP doesn't subtract the negative impacts of pollution or resource depletion. Factories might boost GDP but harm the environment and public health through the increase in CO2 emissions.
GDP in the Real World
When you hear news on the internet about the government launching infrastructure projects to "stimulate the economy," they're trying to boost the 'G' and 'I' components of GDP. When the central bank changes interest rates, it's trying to influence 'C' and 'I'. Economists constantly analyze GDP figures to understand the impact of these policies and predict future economic trends.
So, the next time you hear about GDP figures, you'll know it's more than just numbers. It's a vital, though imperfect, measure of our collective economic activity, influencing jobs, policies, and ultimately, our everyday lives. Understanding it is the first step to understanding the wider economic world around you!
Glossary:
Consumption (C): Household spending on goods and services; the largest part of GDP.
Economic Health: The overall performance of an economy, primarily measured by GDP.
Economic Policies: Government/central bank actions (spending, interest rates) to influence the economy, guided by GDP.
Expenditure Approach: Method to calculate GDP by summing C + I + G + NX.
Exports (X): Goods and services sold abroad.
Final Goods and Services: End products sold to users; counted in GDP to avoid double-counting inputs.
GDP per capita: GDP divided by population; used to compare average income/living standards.
Government Spending (G): Government spending on public services (roads, schools, defense); a component of GDP.
Gross Domestic Product (GDP): Total value of final goods/services produced domestically in a period; measures economic size/health (GDP = C+I+G+NX).
Imports (M): Goods and services bought from abroad.
Investment (I): Business spending on equipment, buildings, factories; builds future production capacity; a component of GDP.
Monetary Value: Value expressed in currency (like Rupiah or Dollars), used to sum items in GDP.
Net Exports (NX): Exports (X) minus Imports (M); the (X - M) component of GDP.
Non-Market Activities: Productive activities outside the market (consuming own produce); not counted in GDP.
Stimulate the Economy: Actions (government projects) aimed at boosting economic activity (GDP components G and I).
Trade Deficit: Imports exceed exports (negative NX); subtracts from GDP.
Trade Surplus: Exports exceed imports (positive NX); adds to GDP.
Unemployment Rate: Percentage of workforce jobless; often falls when GDP rises and rises when GDP falls.
Within a Country's Borders: Production location inside the country determines inclusion in GDP, regardless of company ownership.
