GDP是会骗人的 | 一口气了解GDP

Friends, did you know that GDP can be misleading?

The other day, when I was researching Iran's economy, I wanted to see its GDP per capita.

I saw it surged in the 1980s then declined then rose again after 2000, then declined again.

But do you think this is the true GDP per capita situation in Iran?

I searched for "GDP per capita" and found so many options.

If I clicked on this one, Iran's GDP per capita looked like this.

Goodness , its peak was before the Iranian Revolution in the 1970s and it hasn't been higher since.

If I clicked on this one, it looked like this The most outrageous thing is, if I clicked on this one Iran's GDP per capita looked like this!

If we analyse Iran's economy according to this chart, wouldn't everyone be Elon Musk I'm telling you, these are all statistics from the World Bank.

We can't guarantee their accuracy but they're definitely official.

GDP is arguably the most commonly used indicator for measuring the economy of various countries.

You might think it's just a number that won't lie but there are so many versions like the lions on the Lugou Bridge— different in sizes and shapes.

The intricacies behind this are not simple.

Today, let's talk about this economic indicator that you think you're most familiar with but which is actually very misleading: GDP Gross Domestic Product Gross Domestic Product as the name suggests, the total market value of all the final goods and services produced in a country or region over a certain period of time.

Try to understand there are few points that are easily overlooked First, it's produced within a specific country or region.

For example, if a Chinese person wholly owns a Vietnamese company with all its production facilities in Vietnam whose GDP should the products be counted in?

That's right, Vietnam's .

Even if it's wholly owned, it's still counted in Vietnam's GDP Of course, there's another indicator called GNP Gross National Product in which it is counted as China's GNP Second, it must be final goods.

What does that mean?

Let me give you an example.

A chicken farm raises chickens that lay two eggs.

One is sold to me and I eat it directly That's a final product because I ate it, so it should be counted in GDP.

But the other egg is sold to a restaurant and made into tomatoes scrambled eggs, then the eggs themselves shouldn't be included in GDP because they're not a final product.

The scrambled eggs with tomatoes, however, should be included in GDP otherwise, there would be double counting.

Of course, this isn't easy to define in real life so the accounting is prone to problems. But theoretically, that's how it should be.

Furthermore not all production activities are included in GDP only transactions involving payment are counted.

For example, if Wang makes a toy for his son, that doesn't count.

But if Wang's son then sells that toy to Li's son next door, that's a transaction involving payment, and theoretically, it should be considered a transaction without payment.

Why isn't it included in GDP?

It still represents production, It has value .

The problem is, it's difficult to calculate because you need a market price to measure the value of the product.

Otherwise, it's just a matter of how much you say it is.

For example, if I, Lin, make you a cup of secret-recipe milk tea, and you taste it and think, Wow, it's so delicious!

This milk tea is worth 1million I say that's right, it's worth 1 million.

So, how much is this cup of milk tea worth?

Can we include this 1 million in GDP?

Obviously not, right?

First estimating such a free transaction is extremely difficult second, you don't have complete records.

So, we simply don't include it in the statistics.

Okay, I believe everyone has learned something by now.

I'll give you a few questions to test your knowledge.

Does this count towards GDP?

I spent 500 buying a bicycle does this count towards GDP?

Yes most consumer purchases and merchandises are counted towards GDP.

But if I resell this bicycle to my neighbour, does that count?

No secondhand goods don't count towards GDP.

So I know many of you really like shopping on Xianyu (a Chinese online marketplace) practically buying everything secondhand there.

Your contribution to GDP needs improvement Okay, let's go back to the bicycle let's say I add some nice stickers and modifications to this bicycle and resell it to my neighbour for 5,000 dollars.

Does that count?

Because I've done some extra processing and production, the added value should be counted towards GDP.

But it's not actually that easy to define.

We are done about bicycles.

Now, if I buy an imported sweater made overseas, does that count?

The production of sweaters doesn't count, but some of that might involve domestic shipping and platform services.

So this part does count.

Alright next Does buying stocks count?

No.

If I buy stocks at $50 and they rise to $150 does the $100 profit count?

No, it doesn't.

Stock trading is an equity transfer it's unrelated to production.

So, regardless of how much you gain or lose, it doesn't count.

Similarly, the increase in asset price from any investment isn't included in GDP.

Therefore, a surge in stock prices doesn't directly affect GDP.

What we generally call an impact is indirect, the so-called "wealth effect.

" When stocks rise, everyone feels richer, businesses feel stronger, and it's easier to get loans.

Everyone is more inclined to invest in production which actually boosts GDP.

But the stock price fluctuations themselves don't count.

So, while you see many venture capital and hedge fund bigwigs making billions in the secondary market, they actually don't contribute much to GDP.

However, the services provided by intermediary platforms in these transactions are counted.

For example, stockbrokers charge you commissions, and investment banks earn service fees for helping companies go public These do count.

Let's continue.

Does buying a house count?

New houses, yes, but secondhand houses don't.

New houses are houses that have just been built and produced by developers.

If you buy one, it's considered "residential investment," and it's included in GDP.

Secondhand houses, on the other hand, represent a transfer of ownership somewhat like a transfer of equity.

So, regardless of whether the price goes up or down, it's not counted If you give this house a major renovation and suddenly increase its value, the increase value part does count.

A restaurant makes a plate of scrambled eggs with tomatoes, This does count If they make it but don't sell it, and keep it in inventory to sell later, does that count?

Although it's unethical but yes.

Theoretically once a product is produced, even if it's kept in inventory and doesn't sell, it still counts.

What if Wang buys a bottle of medicine or something on the black market Does it count?

Theoretically, it should, but in practice, it's difficult to include in statistics.

The IMF has previously calculated that the informal sector accounts for about one-third of economic activity in low- and middle-income countries.

Of course, this doesn't necessarily have to be drugs or money laundering We made a cash transaction, and it's difficult to include this category in statistic Even in developed economies, this category accounts for about 15%.

So these can generally only be estimated.

Get the idea?

Let's stop with the practice questions We don't have that many for you.

Since GDP is Gross Domestic Product if someone tells you that GDP is the sum of everyone's income, is that wrong?

Not at all.

Actually, a country's total factor income equals its GDP Theoretically, they are completely equivalent.

However, this income includes not only wages and salaries but also corporate profits and other miscellaneous items. Broadly speaking, GDP can be understood as the income of the entire country.

So, if you look at a country's per capita income, it's different from per capita GDP.

Per capita income only includes the average income of individuals, so it is generally lower than GDP per capita.

For example, in 2024, the US GDP per capita was $85,800, while per capita income was $73,200.

These two cannot be used interchangeably.

Here's a little tidbit for you : In short, the value of all production value in a country, all its income and all its expenditures should theoretically be the same — all of them constitute the country's GDP.

This is actually the classic three methods of calculating GDP: the production approach, the income approach and the expenditure approach It's like being in a class isn't it when someone says, "This problem has three solutions.

" This isn't to say that top students are particularly brilliant and want to show off their multiple solutions; it's just that GDP is very difficult to calculate.

Therefore, most countries use these three methods or two of these methods cross-calculated, to ensure the accuracy of GDP.

So, let's look at each of these methods one by one.

These methods might be a bit theoretical but after listening, you'll have a deeper understanding of GDP.

Let's start with the first method: the production method.

GDP is the gross domestic product, so this method is the most intuitive.

It sums up everyone's contribution towards the value of this product For example, a plate of scrambled egg tomatoes The restaurant buys tomatoes and eggs for $1 each, the dish sells for $10 yuan.

The extra $8 is the restaurant's contribution to GDP.

The tomato and egg factories also contribute.

Adding up their respective added-value contributions totals $10 is included in GDP.

This way, the total added-value of every enterprise nationwide is summed to obtain the Gross Domestic Product (GDP).

Its main advantage is timeliness; the data is readily available because the entire process doesn't involve consumers and each enterprise has a clear division of labour so everyone can calculate their own added-value.

Often, this method is mainly used when estimating quarterly figures but its drawbacks are also obvious it's extremely fragmented.

Imagine having to isolate every single aspect of the entire economy's production process and add them all up.

Even a simple dish of scrambled eggs with tomatoes has to be broken down into the restaurant portion, the egg portion, the tomato portion and then further subdividing the egg portion into the chicken farm portion and the transportation portion.

In short, it 's fragmented beyond recognition It's also easy to miss or double-count.

Do you know what kind of countries or regions this method is generally suitable for?

Places where value-added tax is the main form of taxation, such as mainland China and many European countries.

Think about the calculation of this GDP...

One of the main data sources is tax and financial data meanwhile this value-added tax is levied on the added value, so it is naturally very compatible with the production method.

The second method is the income approach which basically adds up all the income, surplus, and profits of all companies and individuals You don't need to understand the formula; it's not important Let's take the previous example The restaurant earned $8 right?

Let's say the owner gives the chef $3 and keeps $5 for himself.

How do we calculate GDP?

It's $1 from eggs, $1 from tomatoes, $3 from the chef, $5 from the owner, adding up to $10 That's roughly how it works The result measured by this method will generally be lower Do you know why ?

Income statistics are mainly based on tax data but for the income if you report your income, you have to pay taxes.

So many people might avoid reporting their income if possible such as grey income, cash income , or ambiguous income these can't be included in the statistics.

Therefore, at the macro level, the overall figure is usually underestimated .

That's why many countries, like China don't use this method to calculate GDP.

Okay, the third approach, and the most common and important one is the expenditure approach As the name suggests, it sums up everyone's expenditure on the final goods purchased.

In the example of scrambled eggs with tomatoes Regardless of what happened during the production process chef boss ignore everything that happen in between as the final consumer , I paid $10 for this final product scrambled eggs with tomatoes So, my expenditure of $10 is counted in the GDP This is a simpler and more accurate method in actual measurement.

Also, since people can get tax deductions when filing taxes, there's an incentive to report all expenditures.

At the macro level, the statistics are more comprehensive making this expenditure method the most widely used calculation method, used by most countries.

And it has a very important formula: GDP equals consumption plus investment plus government purchases plus imports and exports This formula is very important; you can memorise it or at least be familiar with it, as it's quite commonly used.

For example, many economic analyses are based on this formula, explaining why a country's GDP increased because of its consumption, investment and government-driven growth.

I won't delve into the specifics of the formula, nor do I want to be too academic, but I think it's necessary to clarify one point the investment mentioned here is different from the investment we understand in everyday life.

The investment we usually talk about— buying stocks gold or funds— is not considered investment in GDP.

GDP refers to the inputs of a typical enterprise for production.

For example, if I bought a factory or a machine that's called an investment.

So if someone tells you one day that a large influx of funds into the stock market has caused GDP to rise you can roll your eyes Speaking of which, some of you are probably wondering why we haven't explained why those GDP per capita trends in Iran are different.

Well, that brings us to the various methods we just discussed how to measure GDP each year.

To know GDP you can't just get a static number because it needs to be compared horizontally with different countries and vertically with different time periods.

This requires different adjustments to the annual GDP data.

The problem lies here: different adjustments result in drastically different GDP trend charts.

The Iranian example we just mentioned is definitely not uncommon especially in developing countries.

Using different adjustment methods, the resulting GDP trend charts can be completely different.

Let's take it step by step.

For example, if I take the annual GDP data for Iran without any processing 2024 was 2.16 billion rials, 2023 was 1.58 billion plot these annual data together in a table, it looks like this.

This is obviously unreasonable, right?

Where does the problem lies in?

It's inflation If I want to see a country's true growth, I need to adjust prices to get a figure like this: if I use last year's price level, what should this year's GDP be?

This adjustment index is called the GDP deflator.

It's actually similar to the inflation rate except that inflation measures the price changes of a basket of consumer goods while the GDP deflator measures the average price changes of the entire economy.

After annual price adjustments, we get the second chart: Iran's GDP per capita at constant prices calculated locally.

However, this is calculated in the Iranian rial If we want to compare different countries, the most common way is to convert everything to US dollars.

So, if I convert Iran's annual GDP into US dollars using the exchange rate of that year, we get the third chart: GDP per capita in current US dollars.

This allows Iran to be compared horizontally with other countries.

However, this chart actually includes the inflation rate of the US dollar itself, so after removing the inflation rate of the US dollar, we get the fourth chart: GDP per capita in constant US dollars.

This unifies the exchange rates of various countries allowing for horizontal comparisons between countries, and also unifies the comparisons between different time periods.

This is already quite good, right?

But that's not all. I have another issue to tell you.

Even at the same time, the price of the same product in the US is different from its price in Iran when converted to Iranian rials.

Generally it's cheaper in developing countries, Everyone should have noticed this.

I don't know if you've seen similar questions on Xiaohongshu (a Chinese social media platform) What is the equivalent of an annual income of $200,000 in New York in China?

Think about it, $200,000 is roughly equivalent to 1.4 million RMB.

This question is actually very broad; you can think about it or argue it from countless angles.

So you see the replies below are all over the place.

Some say it's roughly equivalent to 300,000 RMB, some say 500,000 some say 800,000 In short, no one says it exceeds 1.4 million RMB.

In fact, everyone agrees on the fact that the purchasing power of $200,000 in the US is definitely less than the purchasing power of 1.4 million RMB in China.

Don't argue, I'm just giving a rough average purchasing power So if you want to compare the productivity of products and services produced by different countries and remove the price differences between countries, you need to use Purchasing Power Parity per capita GDP Purchasing Power Parity PPP.

For example, China in 2024 GDP is $18.7 trillion, so if we calculate it using purchasing power parity, it's $38.2 trillion more than double!

This isn't my estimate; it 's the World Bank's estimate It actually exceeds the US's $29.2 trillion.

This broadly means that, according to the World Bank's estimates, the price of the same thing in the US is 2.04 times that in China.

Returning to our initial question about Xiaohongshu, a New York income of $200,000 , calculated using PPP is equivalent to a mainland income of $98,000 or 700,000 RMB You can answer that on Xiaohongshu.

Just say it's a World Bank estimate.

Okay, let's get back to the point.

So if you want to see the changes in Iran's real per capita productivity, you'll see this fifth chart : PPP GDP per capita But this hasn't adjusted for inflation yet After adjustment you'll see the sixth chart : PPP GDP per capita with constant prices.

I might be explaining this a bit fast, so you might be confused after listening But that's okay.

In short, these six indicators assess Iran's GDP per capita based on whether the exchange rate is unified, whether purchasing power is unified, and whether inflation is unified If you look at it this way, then PPP GDP per capita with constant prices should be the best indicator, right?

Well, not necessarily What is the best?

You see, the official statistic after GDP figures for the year, all the unified conversions have to be estimated manually and calculated manually.

Especially for countries like Iran, the official exchange rate and the actual exchange rate may differ greatly.

The official inflation figures may not be accurate either.

The outside world doesn't know the price level.

So many adjustment factors need to be estimated by analyst at the World Bank and IMF thousands of miles away .

The more conversion steps you have, the larger the statistical error may be, especially for countries like Iran with insufficient data the accuracy is even lower.

Leave alone World Bank even Universal Bank wouldn't know how much is Iran's true inflation rate.

This is essentially the art of statistics.

The more perfect the indicator, the more human estimation and adjustment are needed, and the greater the calculation error becomes.

This is somewhat similar to the uncertainty principle in quantum mechanics when the precision is high enough, position and momentum cannot be obtained simultaneously.

However, quantum mechanics inherently possesses uncertainty in its physical properties, while GDP as a measurement, cannot be precisely measured.

Therefore because of these statistical errors, when we look at economic data we usually choose a compromise.

While there are ideal indicators of GDP that have everything adjusted, most of the time when we talk about a country's GDP, we are referring to its current GDP in US dollars, which is the GDP of that year converted to US dollars using that year's exchange rate.

Because this data doesn't actually have as many estimations and adjustments at the same time we can also make horizontal comparisons between different countries.

Because of these many calculation methods you'll find a very interesting phenomenon except for the US, the GDP growth rate and annual GDP of other countries don't match up.

What does this mean?

For example, let's look at China's GDP The GDP in 2024 was $18.74 trillion, and in 2023 it was $18.27 trillion.

Based on this calculation, the GDP growth rate in 2024 should be 2.6%.

However, China's GDP growth rate in 2024 was actually 5.0%.

Similarly, for example, if we look at China's official GDP growth rate in 2021, it was 8.6% But if we calculate it based on the annual GDP figures we just discussed, the growth rate would be as high as 21.3%.

Is there a mistake in the calculation?

Actually, there isn't.

there's no mistake.

Generally, when we talk about the annual GDP growth rate, we're referring to the local currency that is, the real GDP growth rate calculated after adjusting for inflation in RMB.

But if we use the GDP figures from those two years to calculate the growth rate it's actually the growth rate after conversion to USD.

It's too affected by exchange rate fluctuations making it less reasonable as a short-term GDP indicator.

But if we look at the long term, some people prefer to look at the USD.

It's a matter of opinion.

Anyway, after discussing so many different and varied GDP figures, I believe you've grasped the general idea that is GDP is not a single objective standard answer It is deceptive.

It becomes misleading when it comes to horizontal or vertical comparisons.

So whenever you see GDP you can always ask, Which GDP are you referring to?

This makes you seem very professional.

Okay, we've talked about what GDP is, how to calculate it how to measure it, and how to compare it Seems like we've covered everything but there's still a fundamental question we haven't addressed why do people value GDP so much Why does it has to be GDP?

Is it without problems?

Of course, there are many problems. What do we generally use GDP for?

To measure a country's economic level or to give a very general idea of ​​its level of development.

But economic level certainly involves more than just productivity.

Let me give some common limitations of GDP For example, it doesn't measure income inequality it doesn't care about people's happiness or quality of life, it doesn't consider environmental damage and it doesn't consider sustainable development, etc. If you consider a country's economic development as a moving car, then GDP simply measures how fast it's going and where it's headed.

Whether the car itself is old or worn out, GDP doesn't care about any of that.

Frankly, these are all quite straightforward, so I won't elaborate.

But even if we only want to measure economic productivity like how fast a car drives GDP actually has some problems. Let's talk about this.

I wonder if anyone has heard of something called the "broken windows theory.

" In other words, a child breaks a window and pays someone to repair it, the whole process doesn't actually improve society and might even waste time or resources.

However, the overall GDP is boosted because the window was repaired.

We just mentioned that GDP doesn't measure the degree of environmental damage.

In fact, not only does it not measure environmental damage, but if the environment is damaged or to put it more extremely, if there's a natural disaster followed by reconstruction, this can actually boost GDP in the short term.

This clearly shows that the GDP indicator is malfunctioning.

Furthermore, a purely false economic boom can also lead to inflated GDP.

What does this mean?

Let me give you an extreme example say I build a playground then I divided them into two groups, A and B.

I said, "Okay, now group A will give group B a back massage Each person in group B will give group A $100 Regardless of whether group B needed the massage, everyone started massaging.

After that, I said, "Okay, now group B will give group A a shoulder massage.

Group A will then give group B $100 and start massaging.

See how this goes on?

In a single day, GDP might surge by tens of thousands.

This is a very typical example of false prosperity.

Sounds absurd, right?

But it does happen in real life.

Companies might collude to trade, offering each other "back massages" and "shoulder massages" to increase revenue.

There's no profit but revenue goes up, and then the entire country's GDP goes up, This is a very typical example of false prosperity and GDP failure.

What I want to say is that even though we know GDP is imperfect but it is the most quantifiable and comparable indicator.

Adding a bunch of adjustments like happiness indices, environmental indices, and income inequality, they won't actually make GDP more perfect On the contrary, it might make it easier to exploit loopholes, becoming more corrupt and unreliable.

In statistics, if a concept cannot be measured stably and repeatedly, it has no practical significance at the policy level.

For such large-scale statistical studies, reliability is often superior to validity.

GDP is already the most reliable indicator of economic level that we can find that can be compared across time and regions In fact, think about other indicators even the most common one like inflation, CPI it measures changes in the prices of a basket of goods.

But which basket of goods should be included?

Should oil and housing be included It is a matter of debate among economists.

Take the unemployment rate, for example.

It measures how many people are looking for work, and there's no universally accepted definition of looking for work.

Therefore, unemployment rates across countries are practically impossible to compare directly GDP, on the other hand is clean, straightforward, and uncontroversial.

This is why countries use GDP as the primary indicator of economic performance.

We started by discussing GDP and the economy, but we've ended up talking about statistics.

In short, you could say that a country's GDP is roughly equal to its economic level Now then shouldn't you ask another question Which GDP are you referring to?