The Bet on GDP between Two Graduate Students in Economics
GDP is a barometer of a country's overall economic condition. People can see the changing trend of national economy from the GDP report, which can determine whether the current economy is in an active period or a recession period. So, how is the GDP index determined and calculated? And what special significance does it have?
One day, two graduate students in economics, A and B, were discussing the issue of GDP growth while walking on the road. After walking for a while, they found a pile of dog feces. A said to B: "If you eat it, I'll give you 50 million." B thought that it was so easy to earn 50 million, even if it smelled bad, he could still wash his stomach after getting the money. So, B ate the feces.
They continued walking, but both felt a bit unbalanced. A had lost 50 million without getting anything, while B, though earned 50 million, felt uncomfortable after eating the feces.
As they walked further, they found another pile of feces. To regain balance, B said to A: "If you eat it, I'll also give you 50 million." A, regretting the previous loss of 50 million, thought that eating a pile of feces was nothing compared to regaining the 50 million, since B had also done it. So, A also ate the feces. In theory, the two should now be balanced, but they both felt something was off. Neither of their capitals increased; instead, each had eaten a pile of feces. They then went to their mentor. After hearing their story, the mentor consoled them: "Students, you should be happy! You've contributed 100 million to our country's GDP by just eating two piles of feces!"
This joke may seem funny, but if the price they had set was 1 billion yuan, they would have created 2 billion yuan of GDP. The content remains unchanged; the feces are still the same feces, the method of consumption is the same, and the psychological satisfaction each person gets is the same, yet the GDP has changed significantly.
Now let's first understand what GDP is.
GDP (Gross Domestic Product) is the English abbreviation for "Gross Domestic Product", a highly watched economic statistic in macroeconomics, used as an important indicator to measure the overall economic condition of a country. It can also be considered the most comprehensive barometer. GDP refers to the final output of production activities by all resident units in a country (or region) within a certain period, involving the field of economic activity. For example, all cars manufactured within China will be counted in China's GDP, even if the manufacturing base or factory is owned by car manufacturers from other countries. GNP (Gross National Product), related to GDP, is the abbreviation for "Gross National Product", referring to the final output of all resident units in a country (or region) within a certain period, including domestic and foreign production activities and services provided. It equals the domestic GDP plus net factor income from abroad. For example, all goods produced by Haier Group in the U.S. are counted as part of China's GNP, not included in GDP. GDP is part of the national income, calculated and reported quarterly.
How is the GDP value determined?
GDP is the core indicator of the national economy. How is GDP data obtained? The calculation of GDP requires three processes: preliminary estimation, preliminary verification, and final verification. First, the preliminary estimation process usually takes place at the end of each year and the beginning of the next year. The annual GDP data estimated during this process is only a preliminary number, which needs to be verified when sufficient data is available. The preliminary verification process generally occurs in the second quarter of the following year. The GDP data obtained through preliminary verification is more accurate than the preliminary estimate, but due to the lack of some important data required for GDP calculation, further verification is still needed. The final verification process usually takes place in the fourth quarter of the following year. By then, all detailed data required for GDP calculation are ready, making the final verified GDP data more accurate.
Secondly, according to international conventions, when new data sources, new classifications, more accurate calculation methods, or more reasonable calculation principles are discovered or generated, historical GDP data needs to be adjusted. For example, the GDP data of the United States from 1929 to 1999 underwent 11 historical adjustments.
In short, GDP data published at different times have different meanings and specific values. One should not doubt the existence of problems in GDP statistical data just because the data published at different times are different. To more accurately grasp the overall economic situation, economists often examine several economic indicators simultaneously, such as contraction indicators, consumer spending, investment spending, government spending, and net exports. Through comparison, the chances of issuing incorrect economic signals can be reduced, and future economic trends can be predicted.
What is the deeper meaning of GDP?
The GDP report is a huge source of information, providing a large amount of information about the national economy, being the most watched economic statistical figure in macroeconomics. Generally speaking, GDP has three forms: value form, income form, and product form. From the value form perspective, it is the difference between the total value of all goods and services produced by all resident units within a certain period and the total value of all non-fixed asset goods and services invested during the same period, i.e., the sum of added value of all resident units; from the income form perspective, it is the sum of all incomes directly created by all resident units within a certain period; from the product form perspective, it is the final consumption volume of goods and services minus the import volume of goods and services. Here, the term "product" not only includes tangible goods like food, clothing, and cars, but also intangible services like education, health care, and beauty. "Final product" refers to those products that are no longer used in the production process, or even if used, will not be consumed or transferred to new products in one go. For example, various spare parts (such as tires) used in assembling cars by an automobile manufacturing plant are transferred to new products in one go, and the electricity used is consumed in one go, all of which are called intermediate products, while only the assembled finished cars are final products. The reason why GDP does not include the value of various spare parts and electricity as intermediate products is that the value of the final product, the car, already includes their value. Adding the value of intermediate products to the value of final products would result in double counting.
The calculation of GDP total usually has three methods: the production method, where GDP equals the sum of added value of the primary, secondary, and tertiary industries, with each industry's added value calculated by subtracting intermediate consumption from total output; the income method, where GDP is calculated as the sum of laborer (individual) income, state taxation (including fees), corporate profits, and depreciation; and the expenditure method, which is resident consumption + government consumption + fixed capital formation + inventory increase + net exports.
GDP can comprehensively reflect the total scale of the entire society's economic activities, serving as a measure of the economy of a country or region.
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