Just like any other science, Development Economics uses a system of measurements to ensure accuracy, compatibility, and consistency. This week's article breaks down Gross Domestic Product, or GDP, which is one of the most important metrics in the field.
GDP is an attempt to measure the scale of all economic activity within a given geographic area. It's distinct from Gross National Product, or GNP, which tries to do the same thing, but based on nationality. Suppose you're a citizen of China, but work in the US. Your earnings affect the US GDP, even though you'd be contributing to China's GNP.
This makes up for the largest share of GDP, and is broken down into goods and services. A good is anything you can gain ownership of. A service is anything you cannot gain ownership of. Common services include haircuts, college tuition, plane tickets, and subscriptions.
It's important to note that while renting may be a consumption service, purchasing a home does not fall under either category (more on that later). Instead, imputed rent, which estimates the potential monthly earnings if a home were to be rented out, is counted.
Investment includes "non-residential capital", "residential investment", and "change in private inventory". "Non-residential capital" is like consumption. The only difference is that non-residential capital is used to create further economic value. Everything from factory machines and software licenses to office buildings falls under this category.
"Residential investment" includes the sale of new homes, complexes, and other non-moving, fixed assets. These don't create new economic value in terms of GDP.
"Change in private inventory" is a bit more complex, though it doesn't have a significant impact on GDP, and isn't worth going into.
This is similar to consumption, but the government is the buyer. These are usually necessities that would otherwise be unprofitable. A good example is public infrastructure.
It's important to note that welfare, social security, unemployment, and other forms of wealth redistribution aren't counted, because they don't create economic value, they merely transfer it.
Exports cause money to enter a given geographic area, leading to an increase in GDP. Imports have the opposite effect. Net Exports, which is just their difference, can be positive or negative.
Earlier, I used the term "final transactions" in describing what is calculated into GDP. Final products are the last step in the supply chain. Anything used to create the final product would be an "intermediate product". Of course, if the final product is just the sum of the intermediate products used to make it, including both would be double counting.
Used products are also excluded because including them would mean counting their final value multiple times. That being said, if a commission is earned by the reseller, that will be factored into GDP.
Finally, the "informal marketplace", which includes everything from making dinner for yourself to the drug trade, is excluded because it can't be realistically accounted for.