Name: Fortune Explains: GDP
Uploaded: 2020-05-11
Duration: 7 min 6 s
Description: Fortune’s Senior Writer Bernhard Warner dives into what you need to know, and why you should care.

Fortune’s Senior Writer Bernhard Warner dives into what you need to know, and why you should care.

Fortune Explains: GDP

International

Fortune’s Senior Writer Bernhard Warner explains.

Hey, Bernard. Hey, Joe From Rome. So what do you say we talk about some GDP? Yeah, GDP is an acronym that most often heard in the business press. What does it stand for? Gross domestic product. It's used all over the world. So the Japanese using the French use it, and we, of course, using. In the United States, Chris domestic product is basically the easiest way to describe the total value of all economic activity that occurs within the country. Even that level of detail can be kind of confusing. The best thing to describe to somebody about GDP is it. It's the health of the economy. If GDP is up, the economy is up. If the GDP is down, the economy is down. So it's more, uh, these days looked at as a quick reference point to see how is the economy winning or losing? At this point, it's just a natural part of us to quickly determine whether or not our society is moving in a direction. We wanted to move it within G. D. P. You have a couple different components, and this is what you might see the first day at introduction to macroeconomics the professor would turn around to the chalkboard and he would write. Or she would write C plus I plus G plus and X inside gross domestic product. You imagine a box, you pull out the box and you'd have seen for consumption personal consumption. It's what we spend on everything from dishwashers to haircut. Another letter we would pull out would be I for business. Investment has everything from real estate home purchases to factory equipment. After that, we have the letter G for government spending. That would be anything from your F 18 fighter jet to the salaries of your preschool teacher, public school teacher. And finally, we have the last letters net exports, which is X minus M exports minus imports. Those would be basically the value of train. If we are exporting more than we're importing, then that number would be positive. That has not been indicates for a long time, and one of the reasons for that is that the dollar is very strong, and so imports look pretty nice for somebody holding dollars in their wallet. The U. S. Economy is a pretty stable machine. It's a locomotive that's moving in a direction. It doesn't take that far up or that far down. And so economists every year when they build their models, they pretty much built in the beginning of the year. And they may tweak it a little bit here and there during the year. But they never tear it up and start over again. Coronavirus cause all the economists to just tear up their GDP models because things have gone completely off the rails and that is not does not happen very often, and economists have to rip up his GDP model. It usually means something really bad is happening. It's a financial crisis. It's a war, or it's something like what we're going through right now. A global center And you might have heard another term connected to GDP and that's called recession. Recession is two quarters in a row of GDP. Going down. Processions are really bad for the economy. They're really bad for economists. They're really bad for consumers and politicians really, really hate the R word. So that's what we're about to head into right now. We're going to go from a period of growth. I think it's been 23 straight quarters of growth two today Officially, we now know that the economy has in fact shrunk by 4.8% which is pretty significant. So the trillion dollar question that economists, business leaders and politicians are trying to trying to get their head around. By how much will the economy shrink? In other words, by how much will the GDP fall? Let's hope it's only a $1 trillion question. It could be more than that. Let me say something, though, about the criticisms of GDP. GDP gets a bad rap it and justifiably, it's not a perfect measure of the health of an economy. There is a good example of this. It's called the Netflix Effect. Yeah, a $12 a month subscription into Netflix. I can watch whatever I want to watch. I'm paying less to consume more where we have created these new ways of pricing the goods and services that we we want. And GDP does not do a very good job of measuring the value of either that service or the consumption of those services. It does not measures something that a lot of people think it's very important, which is the quality, poverty, health and well being, happiness you might think happiness is kind of a squishy idea, but it's written into the into the what the Founding Fathers say. The other thing that it doesn't do a good job actually completely misses is all the things that we do for one another that doesn't get paid child care, volunteering or even look at it another way. If we go go for a job or something like that to to make ourselves healthier, there's a societal benefit to that. We are staying healthy. We presumably stay out of the emergency room and on. So there are. There are limitations, the GDP. It's just that nobody has come up with a better measure. It might be something that we re think again in the age of the Covid 19 pandemic. What are we doing? The best job of really measuring the health and well being, um, an economy. You're going to need the measurement in order to grow responsibility. I'm confident that we will see a a big modifications of the definition of what it means to be a growing economy. GDP is one of these definitions standards that's going to be here to stay