The flow of information plays a major role in driving the economy and its financial market. Whether the information is an economic-data release or some major announcement, the news spread all over the market and impacts the respective area. Gross Domestic Product aka GDP is one key major economic indicator that is used to measure the inflation or the economic health of a country. Many investors and traders use the economic calendar to see the GDP data as a standard to measure economic growth. They use the release of GDP data and make decisions regarding buying, selling or holding investments in the financial market.
But, the question is, “is GDP indicator a good measure of economic growth or not?”
First, let’s talk about - what GDP really is?
Gross Domestic Product (GDP)
“Gross domestic product is the total value of all the goods and services produced within a country during a year.”
It is calculated by valuing the outputs of all goods and services at the market prices. Hereby, the ‘market prices’ means the actual prices at which they are bought and sold. The goods and services calculated in the calculation of GDP are only those which are produced within the domestic geographic boundaries. Means, the income that arises from overseeing investments and possessions will not be accounted for.
Is GDP a good measure of economic growth?
The GDP per person tells us the income and expenditure of the average person in the country. Now that most of us desire to have a big salary and enjoy first-class amenities, GDP per person simply tells the well-being of the average individual in the country.
In short, it tells the living-status of individuals.
Do you believe that?
Well, you shouldn’t!
“GDP is not a measure of well-being but economic growth.” – GDP certainly doesn’t tell how much education one need, how much one can play, or how good or bad our poetry is.
Although it does help us to lead us the good lives. It doesn’t match the health of children but the overall nation. To better understand this, let’s illustrate a few examples:
Example 01: Let’s assume everybody in the country started working on weekends as well. With this, the more goods and services will produce within the country, and GDP would rise. But, it doesn’t mean that the people who are working all week, rather than enjoying their weekends would be better off.
Example 02: Imagine the government eliminated all the environmental regulations, which would allow the firms to create more goods and services, which will ultimately raise the GDP value of the country but well-being most likely fall. The low quality of air will make it difficult for the nearby person to live.
So, clearly, we can say that GDP is definitely not an indicator of living standard although it does tell about the inflation and future direction of the financial markets, allowing investors and traders to make the right decision regarding their investments.