What Does The GDP Really Mean To Us?
Recently, we’ve been hearing good news about the GDP. At first, it’s been higher than initially expected. And more recently, it’s reached the ~7% range that some say means we are in a growth trajectory, and headed for better times.
And just like low inflation rates, it’s being trumpeted as good news. But we can only scratch our heads and wonder why we don’t seem to feel it.
It’s basically a measure of how productive a country is. And the formula for computing it is:
GDP = Consumption + Government spending + Capital Investment + (Exports – Imports)
To clarify that formula a little bit:
- Consumption is all goods and services paid for by citizens – us.
- Government Spending means everything paid for by the government.
- Capital Investment is trickier; they aren’t stocks, bonds or what we usually associate when we say we invest. It’s defined as when companies or people purchase new capital. In this case, capital usually means buildings, equipments, or houses.
So when the GDP increases it can mean any of the following:
- People are buying more stuff (which can mean they have more money to spend)
- The government is spending a lot (which might create jobs for people)
- More capital investments are being made in the country (which might mean companies are expanding or starting up – which means more jobs)
- We export more than we import (which means the money generally flows towards us)
So with all that, are high GDP growth rates really good news for common people like us?
Well, surprisingly, the answer is not necessarily. A high GDP is generally a good sign. But it’s important to know what caused the high GDP and how those causes affect us.
If it was primarily caused just by exporting more products then the profits go mainly to the manufacturing companies that export goods.
That is a good thing. But they might not hire more people (and thus not create more jobs). Because next year if other countries don’t buy their products, for any reason, they will suffer losses. They need to keep their work force lean so they can go through tough times without laying people off or going bankrupt.
And if the higher GDP is mainly because of government spending, then it also isn’t sure that better times are ahead. Our government would need to properly spend that money on the correct projects that will create sustainable jobs.
For example, they could build hundreds of airports in far flung areas and build millions of kilometers of roads and bridges to uninhabited places. GDP would spike, but with no one or only a few benefiting from those projects, the economy will remain unchanged.
The GDP could also jump because of people using foreign remittances of OFWs to buy a lot of stuff. But OFWs will one day go home, and unless their remittances were used to start businesses or buy other income-generating assets (like rental properties, dividend-paying stocks, etc.), then there isn’t any real progress.
In real life, our country’s higher GDP is said to be based on: higher exports, a booming BPO sector, higher consumption (still due to OFW remittances), and a booming construction industry.
So it’s good news only because our economy is growing. Unfortunately, it’s not the sort of growth that will change our lives.
|The thing to do; regardless of GDP.
So how can we take advantage of this situation?
The truth is, GDP is too high-level. High GDP growth rates doesn’t necessarily mean improvement in our lives. It’s good news for the country, but not necessarily for us common people.
But a country with a growing economy is an attractive investment. So if we continue to invest wisely (stocks, UITFs and mutual funds, etc.) the effect should trickle down to us through better returns on our investment.
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