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hi Gigi from the RBA in this video on
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economic growth we're going to talk
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about gross domestic product or GDP
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first let's hear a bit about economic
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growth economic growth refers to how the
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size of an economy changes over time and
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the size of an economy is generally
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expected to increase over time when most
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people hear the term economic growth
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they think of gross domestic product or
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GDP GDP is the most well known method
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used by economists to measure the size
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of the economy and the change in GDP
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over time is often referred to as
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economic growth
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now GDP measures the total production of
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goods and services in the economy
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breaking down the name can help you to
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remember this the G for gross means
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total the D for domestic means within an
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economy an economy is just a group of
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individuals which we usually define by a
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geographic area an economy could be a
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state a country a group of countries or
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even the whole world and finally the P
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for product means the production of
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goods and services
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now there's three different methods
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which you use to measure GDP these are
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called the production income and
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expenditure methods in Australia the
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Australian Bureau of Statistics or ABS
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is responsible for measuring GDP they do
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this four times a year or once a quarter
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the Avs collects data from many sources
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in particular via surveys of households
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and businesses they then use all of this
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data to come up with GDP you might be
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wondering why we need three measures of
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GDP
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you've probably only ever seen one
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measure on the news and even in most of
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the RBA's publications well the issue is
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that the ABS can't measure the
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production of every good and service in
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the economy because this would take too
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long as a result it can only estimate
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GDP using the data that it collects the
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different measures of GDP are three
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separate ways to measure the same thing
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having three separate ways to measure
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the same thing allows the ABS to cross
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check that it's arriving at a reason
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ballistamon let's talk a bit more about
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these measures the first one I'll talk
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about is GDP expenditure or GDP this is
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the measure you'll see the most GDP
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captures all of the spending on final
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goods and services by households
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businesses and the government GDP income
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or GDP I measures the total income
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generated by households and businesses
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in the process of producing goods and
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services the households the largest
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component of this is their wages for
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businesses this is their profits as both
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of these are adjusted for the taxes and
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subsidies on the production of goods and
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services and finally GDP production or
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GDP P GD P P measures total value-added
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in the economy what is value-added well
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think about when you produce something
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you take some inputs and you use them to
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make some outputs if you make a sandwich
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you take some ingredients which are the
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inputs and assemble them into the
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sandwich which is the output GDP P
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measures the extra value you create by
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producing something in the case of the
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sandwich it's the value added by turning
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a bunch of ingredients into someone's
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lunch importantly in GDP P you don't
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count the value of the inputs used to
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produce the output this is because these
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inputs are the output of someone else
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for the sandwich someone else produced
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the ingredients they bake the bread they
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grew the salad etc and so that's counted
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as their value add so we weren't counted
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again in ours
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let's look at another example let's
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imagine there's an economy that consists
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of an apple tree with five apples on it
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we'll call this the Apple economy we can
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use the Apple economy to show how the
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three different types of GDP are
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measured so imagine that I earn the
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apple tree and you come along and you're
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really hungry and so I sell you the five
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apples on the tree for five dollars that
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would be GDP II the money that you spent
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on the apples and so in the process of
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that you've given me five dollars it
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doesn't cost me anything to grow the
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apples the tree is already there and the
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Sun and the rain that are needed to grow
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the apples is free so my profit from
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selling you the apples is five dollars
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and
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GDP I in the process of growing the
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apples I've also generated five dollars
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worth of output so those are the five
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apples that will grow the only inputs
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that I've used are the Sun and the rain
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which as I said are free so their value
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is zero so this means that value added
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from producing the output apples is five
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dollars so the five dollars of output -
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zero dollars of inputs that would be Gd
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P P so obviously this example is very
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simple for one it's rare to produce
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something where the inputs don't cost
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anything and the example also ignores
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things like the expenditure multiplier
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which we discuss in another video but
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it's useful to show how one transaction
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you buying five apples from me can give
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rise to our three different measures of
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GDP so now we're comfortable with the
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different ways the ABS measures GDP and
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as I said before because these are all
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estimations they'll always be slightly
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different to calculate official GDP
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which is the number you'll hear about
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the ABS takes the average of these three
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measures and this is called GDP a this
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chart shows the growth of GDP under each
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of these three measures this is year
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under growth which means that we're
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looking at how GDP changed in one
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quarter compared to the same quarter one
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year ago the takeaway from this chart is
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that the different measures of GDP are
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normally all a bit different from each
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other because they're all estimates
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occasionally the differences can be
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large
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especially when the movements in GDP are
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large and that's why we take an average
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of these three measures the average of
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these three measures is the line on this
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chart which is from the chart pack on
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the RBA's website this line is real GDP
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growth or growth in the volume of goods
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and services produced by the economy
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this is the measure of GDP you're most
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likely to hear about on the news and see
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in RBA publications there's a related
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video that discusses what a real measure
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of an economic variable is and you can
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find a link to this in the description
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so far in this video we've talked about
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what GDP does measure but what about the
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things that GDP doesn't measure it's
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important to be aware of these things
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too because they impact the economy
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even if they're not captured in GDP so
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for one GDP doesn't measure the time we
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spend doing domestic activities like
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cooking cleaning or caring for children
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these activities are important and this
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is something some people consider to be
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a shortcoming of GDP because if you pay
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someone else to do these activities it
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is included in GDP
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the problem with including domestic
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activities in GDP is that it's difficult
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to measure them I bet that you don't
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count how many hours a week you cook or
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clean and also how would we ascribe
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value to your cooking versus my cooking
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if you're a better cook than me when
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money changes hands the measurement is
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much easier because the money is what
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captures the value of the service
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performed another issue with GDP is that
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it doesn't measure the individual
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welfare of people there's a common
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phrase that GDP doesn't measure
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happiness which is definitely true but
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then again it's not designed to measure
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happiness one thing with GDP to consider
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is that if the population grows faster
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than the economy then the growth in GDP
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per person which is also called GDP per
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capita
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would be negative this chart shows the
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growth in real GDP versus real GDP per
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capita each quarter
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so GDP is on the top panel and GDP per
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capita is on the bottom you can see that
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growth in GDP is mostly higher than GDP
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per capita because Australia's
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population is generally increased over
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time occasionally you can see that
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growth in GDP per capita is negative in
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fact for two quarters in a row at the
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end of 2018 GDP growth in GDP per capita
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was negative even as growth in GDP was
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positive at the time some people called
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this a per capita recession another
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thing related to individual welfare is
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that GDP doesn't tell us anything about
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how evenly the income is distributed
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among the population a concept which is
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called inequality for example imagine
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two scenarios one where everyone in
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Australia in the same income and another
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where one person earned all the income
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in Australia GDP I would be the same in
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both of these instances despite these
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two versions of Australia being very
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different
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and finally GDP is a flow not
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dock and this means that GDP sometimes
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measures things in ways that you might
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not expect people use the stock flow
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language often which is why I've
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introduced it to you but I think it can
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be confusing so let's look at an example
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so imagine that you have a river and
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this river supplies water to a lake so
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the river is the flow of water and the
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lake is the stock of water GDP is
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comparable to the amount of water that
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flows through the river and into the
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lake over a period of time the water in
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the lake is everything of monetary value
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that exists in the economy all of our
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possessions homes buildings roads other
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assets etc so GDP doesn't measure the
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size of the lake and it also doesn't
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measure any water that disappears from
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the lake say because it was evaporated
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by the Sun or someone took it out now
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what this means is that there's some
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things that don't make us better off
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which can increase GDP take for example
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the bush fires in 2019 2020 where a
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number of people tragically lost their
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homes you can think of that destruction
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as water disappearing from the lake so
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by itself this doesn't change GDP even
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though it's made the country worse off
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however these people will need to
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rebuild their homes right the process of
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rebuilding these homes would be
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considered part of GDP because it's the
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production of a new good a new house in
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our example it's the new water flowing
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through the river to replace the old
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water that disappeared from the lake so
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the rebuilding of homes because of the
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bush fires would actually increase GDP
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even though it's resulted from a natural
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disaster and caused a great number of
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people hardship so I'll leave it there
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for our introduction to GDP in a related
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video I'll talk more about how we can
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analyze GDP using a demand and supply
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framework some useful links including
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two related videos are in the
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description see you next time
