Gross Domestic Product - GDP

How do you triangulate just how great your country is? You can measure how many missiles you have, or the number of Olympic medals you win, or the number of Starbucks locations you have...or you can measure the strength of your economy

How do you do that?

Economists use two main measures. One is called Gross Domestic Product...and the other is called Gross National Product. Now Gross Domestic Product might sound like what happens when you flush a baby alligator down the toilet and three years later, it crawls back out looking for its mommy. But in actuality, it represents the total value of all the stuff you make in your country, along with all the services you and your fellow citizens provide.

You live on the sovereign island nation of Squishquad Skerry, located just offshore of Norway.

You are one of twelve inhabitants, and all of you fish herring all day long. Each of you catches an average of 10 pounds of herring a day. Herring sells for about $10 per pound. Everyone works 200 days a year. So, multiply that all up...you get 12 people working 200 days each, each catching 10 pounds each day with each pound selling for $10 per pound. The GDP of Squishquad Skerry is $240,000...that's the value of all the stuff your country made in a year. Not bad for a rocky island in the middle of a Norwegian Fjord.

Meanwhile, elsewhere in the world, the numbers get a bit higher. For instance, the GDP of the U.S. was about $18.6 trillion in 2016. So that's...a little bit more.

But of course, the U.S. has 325 million people (instead of the 12 Squidquadians) and its GDP includes things like airplane manufacturing and high-value financial transactions (instead of just herring fishing). So it makes sense that the U.S. economy would be much, much bigger.

To look at how an economy is doing, people usually watch how it changes over time. Say one of your fellow Squishquadians starts fishing with dynamite. With the new technique, output goes from 10 pounds a day to 12 pounds. Next year, with the new output, your GDP goes up to $288,000. That's 20% GDP growth. Big, complex economies like the U.S. pretty much never see growth rates like that. Economists usually consider a growth rate of 2% to 3% for the U.S. to be healthy.

Smaller countries and developing countries can have bigger growth rates. Take China. It's a big country: biggest population in the world, with more than 1 billion people. But it still racks up relatively high GDP growth rates because of the rapid expansion of its manufacturing base. As recently as 2010, China posted an annual GDP growth rate of 10.6%. It hit double digits five consecutive years between 2003 and 2007.

GDP doesn't always go up. The year after discovering dynamite fishing, Squishquad suffers a series of significant storms. The number of workdays go down from 200 to 190. Everything else stays the same. GDP falls to $273,600 from the $288,000 seen in the first dynamite year.

That's a decline of 5%. Economists call that decline a contraction. If a contraction happens for two or more quarters in a row (two three-month periods in a row), the country is considered in a recession. If the contractions are deep enough and last long enough, that's a depression. And not the kind you can take drugs for.

Both GDP and GNP measure the economic output of a country. The difference?

Gross Domestic product consists of all the products and services made in a given year inside of the country. So...made within the borders of the country. Made domestically.

Gross National Product measures the stuff made by people or companies from a country, regardless of where it's actually made. So GDP tracks where it was made. GNP tracks who made it.

If an American knits a toilet cozy while sitting in his living room in Des Moines, it gets included in both GDP and GNP. However, if an American goes on vacation to Cameroon and knits a toilet cozy in his hotel room there, it's included in GNP but not in GDP. It was made by an American, but not in America.

Meanwhile, if the American comes back home to Des Moines and a Scottish friend of his comes over and knits a toilet cozy for him, that would count in GDP but not GNP. The toilet cozy was made in the U.S., but not by an American.

In the old days, like before the 1990s, GNP was typically used to track national economic growth. However, with the dramatic rise of globalization around that time, GDP became much easier to track. Eventually, it became the go-to measure of growth. To review, both GNP and GDP track national economic output. They both look at the amount of goods and services produced by the country, though they have different working definitions about what that means.

The size of GDP and GNP are impacted by the size of a country and the level of economic and technical sophistication. Big, complex economies like the U.S. usually aspire to modest growth, somewhere between 2% and 3%. Smaller countries and developing economies can post much higher growth rates, with percentages in the double digits not being all that uncommon.

GDP measures the value of stuff produced within a country, regardless of who makes it. GNP measures the value of stuff made by citizens of a country, regardless of where it is made. So if a Squidquad citizen were to float a raft into Norwegian waters and catch some herring there, it would count in GNP but not GDP.

Meanwhile, if he invited a Norwegian friend over for a day of fishing, anything the Norwegian caught would count in Squidquadian GDP, but not in Squidquadian GNP. If the Squidquadians were to launch a surprise attack on Norway, though...well, then all bets would be off.