The standard measure of what a country produces: gross domestic product (GDP)

The standard economic measurement of what a nation’s economy produces is called the gross domestic product (GDP). It is “the market value of all final goods and services produced within a country in a given period of time.”[1] The period of time ordinarily used is one year.

This definition includes “goods and services.” “Goods” include all the shoes, clothing, vegetables, bicycles, books, newspapers, cars, and every other material thing that is produced and then sold in the market. “Services” include things such as classes taught by teachers, examinations given by doctors, or the work of paid housecleaners.

“Market value” means that goods and services counted in GDP are sold legally in markets. A loaf of bread baked and eaten at home is not counted in GDP because it is not sold in a market. But loaves of bread baked in a home and then sold in public are counted, because they have been sold in a market and a monetary value can be attached to them.

The size of a nation’s GDP is the main factor that determines its wealth or poverty. This is because per capita income is calculated by dividing the GDP by the total population. If the population does not change much from year to year but the GDP grows, the per capita income goes up.[2]

For example, in 2011, Honduras had a GDP of $36,100,000,000 (about $36 billion)[3] with a population just over 8 million people. If we divide $36 billion by 8 million, we have a per capita income (in round numbers) of about $4,500.

But if Honduras could somehow double its GDP from $36 billion to $72 billion and still have a population of 8 million, its per capita income would double to about $9,000 per person ($72 billion divided by 8 million people). The “average” person in Honduras would be twice as wealthy as before. Increasing a nation’s GDP is what moves it along the path from poverty to greater prosperity.

What will increase a country’s GDP?

The most important question, then, is this: What will increase a country’s GDP?

The answer is complex, involving as many as seventy-eight factors, all of them contributing to or hindering the growth of GDP. Answering this question in detail is what the rest of this book is about.

But we can briefly say here that GDP is increased when a nation continually creates more goods and services that have enough value to be sold in the marketplace. Therefore, the focus of efforts to overcome poverty must be on increasing the production of goods and services.

The correct goal for a poor nation, then, is to become a nation that continually produces more goods and services each year. If a nation is going to succeed in overcoming poverty, it must be willing to examine its official policies, laws, economic structures, and cultural values and traditions to see whether they promote or restrain increases in the goods and services that the nation produces.

  • [1] N. Gregory Mankiw, Principles of Economics (Orlando, FL: Dryden Press, 1998), 480.
  • [2] More specifically, as long at GDP grows faster than the population, the per capita income will go up.
  • [3] In this illustration, we continue to use figures based on purchasing power parity (PPP); see note 2above. The other method of measuring GDP, the “nominal” GDP based on official currency exchangerates, gives a GDP for Honduras of $15,340,000,000. Our example works no matter which basis is usedfor the calculation.
 
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