We hear about GDP (Gross Domestic Product) a lot in the news but what is it exactly?

 

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.

 

 

So how is it calculated?

 

The calculation of a country’s GDP encompasses all private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs, and the foreign balance of trade. Exports are added to the value and imports are subtracted.

 

For a complete guide to GDP follow this link to Investopedia’s blog on the subject.

 

Personally I am a sceptic when it comes to statistics. “Lies, damned lies, and statistics” is a phrase attributed to Mark Twain describing the persuasive power of statistics to bolster weak arguments, “one of the best, and best-known” critiques of applied statistics. It is also sometimes colloquially used to doubt statistics used to prove an opponent’s point.

 

For example, China has produced much higher GDP figures than most other countries for many years. Are these figures actually reliable or have they been exaggerated? My ex-Chinese wife once explained to me that when she worked for a large Chinese company she was forced to disclose much higher sales figures than had actually occurred, typically double the actual sales. This irked her greatly because she is an honest person.

 

 

 

France’s GDP in 2024 is $3.13 trillion whereas the UK’s is $3.5 trillion. The UK is ranked the sixth largest economy in the world and France is ranked seventh. However, whenever I have visited France I have always considered it to be a far less wealthy country than the UK is. My French friend Pierre agrees with me! The UK ranks 15th on the Global Human Development Index, while France only ranks 24th.

 

France’s economy was 58% public sector in 2022. It’s the second highest in the EU. Because government expenditure makes up a significant part of the GDP calculation in France, it makes France’s GDP figure higher than it should be in practice. France is still very much an agricultural economy but it is artificially propped up by the EU’s Common Agricultural policy which inflates food prices in addition to French farmers benefiting from EU subsidies and grants. Take away France’s continued colonisation of 14 countries in Africa with the CFA franc and it would become a poor country overnight.

 

A significant factor which isn’t taken into account in GDP calculations when it comes to the amount of goods and services produced is that only the turnover is used, not the profit from trading. This means that a country that has high GDP because its businesses have high turnover doesn’t mean the turnover is profitable. It could well be unprofitable in which case GDP is overstated.

 

So as you can see GDP has many flaws so it is important to always question its validity. You know it makes sense*

 

 

*RISK WARNING

The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this blog is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. The Financial Conduct Authority does not regulate tax planning, estate planning, or trusts. This blog is based on my own observations and opinions.