GDP, or Gross Domestic Product, measures a country’s wealth, but it is only one type of indicator among others. The wealth of a country represents everything that is produced in that country in one year
How to calculate GDP?
To calculate a country’s GDP, it is necessary to add up all that is produced in that country, i.e. all its added values. There are two types of added value:
- The added value of non-market products: This form of added value represents the services offered by certain administrations, such as the hours of lessons taught by a teacher.
- The added value of market products: This added value is that produced by private companies. They correspond to their turnover. The formula is simple:
(Product prices * Number of products sold) – Intermediate consumption
Intermediate consumption represents all goods and services destroyed or processed during the manufacturing processes of the final product.
Nominal GDP and Real GDP?
The notion of price is therefore one of the elements found in the value added used to calculate GDP. It is possible that sometimes the price of the same product increases or decreases from one year to the next. In this case, a country’s GDP may differ from year to year for the same number of goods produced. When GDP is calculated without regard to price changes, we are talking about Nominal GDP.
Real GDP is obtained by removing the “price change” factor in order to take into account only the change in the quantities produced. This change in the quantities of goods produced is measured by the CPI (Consumer Price Index) established by INSEE.
Real GDP therefore makes it possible to compare significantly the level of wealth from one year to the next.
How is the level of wealth between two countries compared?
Each country has its own currency. In order to compare two GDPs, it is sufficient to convert the GDPs of each respective country into a single currency: the PPP dollar, Purchasing Power Parity. This makes it possible to erase the differences in price levels between each country.
Be careful, the comparison of GDP does not stop there, it is also necessary to take into consideration the number of inhabitants in each country. The more people there are, the more important a country’s overall production in terms of products and services can be.
The wealth potential of each inhabitant is obtained by dividing the GDP of each country by its respective number of inhabitants.
BIB as another indicator of wealth
A country’s wealth is not necessarily limited to its quantity of goods produced. Some economists consider that it could also take into account the quality of life of each individual in the country in which they reside. Indicators such as BIB, Gross Domestic Happiness, integrate concepts such as health, household purchasing power and the balance between professional and family life. However, these new criteria are difficult to measure but nevertheless make it possible to foresee a new approach to the economy.
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