Question

• What was/is the GDP number released/predicted and why is the number growing or contracting?
• What is a revision to GDP and why does it occur?
• What do revised numbers say about the health of the economy?
• Explain why certain information, while, perhaps, pertinent, to the economy, isn’t accounted for in GDP.

Answer 1

1) The GDP is short name for the gross domestic product or the overall production of final goods and services in the economy. Most countries use this as a benchmark to judge the economic progress and through research and previous numbers report the expected GDP for a quarter or a year. There are numerous agencies which judge the GDP growth rate of a country and predict which way this estimation would go these include the likes of Moody's as a private company and other organizations such as the World Bank which also assesses countries on past performance and future outlook. The countries on the other hand themselves also predict and report GDP numbers.

The number contracts or expands on the basis of economic indicators such as employment, investment and future growth prospects for a country. For example, as a result of the Corona Virus Pandemic situation, most economies reviewed their GDP growth rates and contracted the same, which means that as compared to the previous year, this year’s growth rates would be negative and the economy will shrink. This is because of decreased consumption as well as production in the country.

2) A revision to the GDP takes place, when due to certain external shocks to the economy, either the demand for goods and services becomes too high or too low due to which the earlier estimates require revision. As explained in the sections above, if the United States was supposed to grow at a 2% rate as expected by economists in the pre Covid era, the revision came as a result of sudden changes wherein the country experienced serious reduction in overall consumption and production because of which the new estimates indicated that the economy may see negative growth rates.

3) The revised numbers indicate if the country is moving forward or not. For example, if the growth rates were expected at 2% and instead were revised to 5% it indicates that the countries health is improving very quickly. On the contrary, a reduction in the GDP growth estimated rates indicate negative economic conditions in the country which could be a result of various factors such as slowing production, rising unemployment or aggregate demand.

4) The GDP only accounts for the value of final products and services produced in the economy. While other things such as quality of goods, quality of life and other variables such as second hand market may be important for the economy, the GDP does not consider qualitative aspects of production or of life at large and only includes those products which are ready for final consumption. This is to avoid double counting on one hand, and to keep the measure simple on the other. For example, the wood produced when used for making beds, the beds are the only products which are counted in the GDP. Similarly, illegal transactions are important for the economy and must be removed from the system as much as possible and tell if the country is growing or not, yet they are excluded from the gross domestic product of the country. This is to avoid over estimation or underestimation of the final value of goods and services.

Please feel free to ask your doubts in the comments section.