Forum Institutional

GDP: What is it and why does it matter?

Different currencies of different nations -- why GDP is losing relevance

GDP refers to 'gross domestic product'. Image: Unsplash/John McArthur

Victoria Masterson
Senior Writer, Forum Agenda
Share:
Our Impact
What's the World Economic Forum doing to accelerate action on Forum Institutional?
The Big Picture
Explore and monitor how Economic Progress is affecting economies, industries and global issues
A hand holding a looking glass by a lake
Crowdsource Innovation
Get involved with our crowdsourced digital platform to deliver impact at scale
Stay up to date:

Davos Agenda

This article is part of: World Economic Forum Annual Meeting

Listen to the article

  • Gross domestic product has been used to measure economic growth since 1937.
  • But new tools are needed to measure the wellbeing of countries and their people, experts argue.
  • GDP is based on the total value of all goods and services produced in a country.

It’s been the standard measure of economic growth for more than 70 years, but gross domestic product (GDP) is starting to look outdated, some experts say.

This is because, as a key tracker of global progress, it is unable to account for and measure human, social or natural capital.

So, what can GDP tell us about the states of our nations and why does it matter?

Have you read?

What is GDP?

GDP measures the health of national and global economies, the International Monetary Fund (IMF) explains.

GDP data is based on the total end value of all goods and services produced in a country over a particular period.

Measuring GDP shows the size and growth rate of an economy.

There are three ways to calculate GDP, explains the Bank of England, the United Kingdom’s central bank. You can add up the total value of goods and services produced in a country – or you can add up everyone’s income. The third way of calculating GDP is to measure what everyone in the country has spent. This includes household spending, investment, government spending and net exports – the value of your country’s exports to other countries minus the value of imports to your country.

Discover

How is the World Economic Forum helping companies track their positive contributions towards achieving the Sustainable Development Goals?

GDP was first proposed as a concept during the Great Depression in America in 1937, according to financial information site Investopedia. Economist Simon Kuznets proposed it in a report to the US Congress. It was later widely adopted as a standard way to measure national economies.

Why does GDP matter?

GDP helps policymakers, investors and businesses make decisions by understanding an economy’s health, Investopedia says.

It can be used to compare different countries and regions.

When GDP is growing, workers and businesses are generally better off than when it is not, says the IMF.

“When GDP is shrinking… employment often declines”, the IMF adds.

GDP helps governments decide “how much it can spend on public services and how much it needs to raise in taxes,” explains the BBC.

If GDP declines over two consecutive quarters, it shows the economy is in recession. This can mean “pay freezes and lost jobs”, the BBC adds.

Globally, the war in Ukraine is expected to contribute to a “significant slowdown” in growth this year, the IMF warns. Using real GDP data – which strips out the effect of inflation on goods and services – the IMF predicts global growth will slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023.

An infographic showing growth projections by region
How reliable is GDP as a contemporary measure of economic health? Image: IMF

What do experts say about GDP?

Experts say GDP is an imperfect measure of an economy’s health, for various reasons.

For example, GDP doesn’t measure population growth. If GDP in the UK rose 2%, but the population grew 4%, the average income per person would actually have fallen, the Bank of England explains.

There are also things that inflate GDP, but don’t make the country more prosperous.

Government spending on war, for example, can push up GDP. Chopping down a chunk of the Amazon rainforest and selling the timber might also show up as a spike in GDP – “but at huge environmental cost”, the Bank of England adds.

A growing argument against GDP is that it doesn’t measure the wellbeing of a country and its people. Wellbeing, equality and inclusion are key measures globally of sustainable development – and against this backdrop, the World Economic Forum suggested in 2016 that GDP was “struggling to stay relevant” on its ‘Beyond GDP’ platform.

One solution proposed by the Forum is to establish a common, core set of metrics and recommended disclosures that corporations could use to align their mainstream reporting and, in so doing, work towards growth that is sustainable and inclusive. This work has resulted in a coalition of CEOs who support progress on convergent sustainability reporting standards and the International Sustainability Standards Board (ISSB) is now working to create a universally accepted sustainability reporting standard.

Loading...
Don't miss any update on this topic

Create a free account and access your personalized content collection with our latest publications and analyses.

Sign up for free

License and Republishing

World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

Related topics:
Forum InstitutionalEconomic GrowthEquity, Diversity and InclusionSocial Innovation
Share:
World Economic Forum logo
Global Agenda

The Agenda Weekly

A weekly update of the most important issues driving the global agenda

Subscribe today

You can unsubscribe at any time using the link in our emails. For more details, review our privacy policy.

Institutional update

World Economic Forum

May 21, 2024

About Us

Events

Media

Partners & Members

  • Join Us

Language Editions

Privacy Policy & Terms of Service

© 2024 World Economic Forum