Although I am not a professional economist, I have read two macroeconomics textbooks, so I have some understanding of this area. Many people have misconceptions about GDP, so I will provide a brief introduction to it. It’s not very profound; the two macroeconomics textbooks I read are at the undergraduate freshman level. I did not consult any materials while writing this article, relying solely on memory, which is unreliable, so please feel free to correct me if there are any errors.

Definition

GDP, Gross Domestic Production, refers to the total value of goods produced by a country over a period of time. Every word in this definition is important and cannot be omitted. Let’s break it down.

A Country

GDP measures the goods produced within a country, not across several countries, which is important for understanding the contributions of multinational companies to local economies. For example, the iPhones produced by Apple in China are counted in China’s GDP. The glass produced by Fuyao Glass in the United States is counted in the U.S. GDP.

Over a Period of Time

Typically, GDP statistics specify the time frame over which the number is calculated, such as a quarter or a year.

If a company produces goods this year but sells them next year, should it be counted in this year’s GDP or next year’s GDP? The goods produced but not yet sold are considered as purchased by the company itself. Therefore, they should be counted in this year’s GDP, and should not be counted again next year.

For a property that sold for 500,000 twenty years ago and is now selling for 10 million, how should this property be counted in GDP? The answer is that the property will not be counted in this year’s GDP because it was already counted in the GDP when it was produced twenty years ago. The same applies to stocks.

Goods Produced

This means that GDP does not account for unpaid labor. Babysitting a neighbor’s child for free will not be counted in GDP, nor will the immense value created by homemakers, unless the family pays the homemaker a salary, which can be seen as the woman selling (this term is neutral and not derogatory) her labor.

Total Value

Firstly, just as Bentham's utilitarianism ultimately fails, we cannot measure the true value of something that is universally applicable to everyone. Therefore, we only measure the economic value of a good by its final selling price. This means that value beyond price cannot be measured. Goods that cannot be publicly priced, such as those in the black economy or illegal activities, cannot be counted in GDP.

"Total value" also means that the costs of intermediate stages in producing a good are not counted multiple times. For example, a loaf of bread has a flour cost of 5 yuan, a fermented flour cost of 8 yuan, and is finally sold for 15 yuan, so only the 15 yuan is counted in GDP.

This leads to another method of calculating GDP, which is to account for the value added by goods. The flour costs 5 yuan, the fermentation adds 3 yuan, and the pastry chef adds 7 yuan, still totaling 15 yuan. In our country, GDP is calculated through value-added tax invoices. If false invoices are issued, GDP will be overestimated; if taxes are evaded, GDP will be underestimated. Therefore, due to these technical issues, GDP statistics are not entirely accurate.

Accounting Identity

The reason the accounting identity always holds true is due to the way it is defined. For example, the number of people in the world = the number of women in the world + the number of men in the world (Toyotomi Hideyoshi? Seems like something is off, but let’s not get caught up in these details). The components of GDP can be categorized as:

Y = C + I + G + X

C is Consumption, I is Investment, G is Government Purchase, and X is Net Export. Thus, GDP = Consumption + Investment + Government Purchases + Net Exports. To briefly explain, C includes what is commonly referred to as "investment," such as purchasing real estate, stocks, and funds. I refers to the acquisition of production equipment and other assets by companies. G does not include transfer payments.

From this simple formula, we can also interpret some policies. For example, in the "dual circulation" strategy, if X is not performing well, C needs to increase. The 4 trillion yuan stimulus aims to boost Y through G.

From this simple formula, we can also correct some common misconceptions. Some people believe that consumption is a wealthy mindset while saving is a poor mindset; others think that cities are built on consumption, that spending money will lead to others paying me back. The older generation’s preference for saving is often unable to comprehend the workings of modern urban life. Nowadays, no one keeps cash under their bed; the money saved goes into banks and ultimately into loans, becoming investments. Both consumption and investment are components of GDP. What constitutes a correct consumption perspective? After much thought, it boils down to a simple truth: one should neither blindly save money nor blindly spend it.

Nominal GDP vs. Real GDP

The term nominal refers to nominal, with the root meaning "of no use" (for example, a nominal boyfriend is essentially a useless boyfriend).

In economics, any quantity that incorporates monetary factors is called a nominal quantity. Since GDP calculations include prices, changes in the price of a good will lead to changes in GDP (sometimes due to excessive money printing). Therefore, to understand the productivity excluding price effects, we introduce real GDP. A base year is chosen, and subsequent GDP is calculated using the prices of that year.

Is GDP a Good Indicator?

Yes.

GDP is not a perfect indicator. For instance, it cannot measure the value of a beautiful environment or the happiness of citizens. On congested roads, cars consume more fuel, generating more GDP while also producing more exhaust.

However, GDP is a good indicator; its fluctuations are highly correlated with a country's economic welfare. Countries and regions with high GDP also tend to have higher levels of education, healthcare, life expectancy, and material living standards. Countries with long-term GDP growth also give the impression of sustained development.

In our country, the bureaucratic evaluation system is top-down, and the promotion of local officials largely depends on the completion of various indicators. We should be grateful that GDP is such a good indicator, as it has brought widespread economic welfare to the entire population over the past 40 years.