The GDP Thread

[nigelforbes]

I want to try and improve the general understanding of what GDP is and is not. Mostly, the terminology that is used because the media uses words interchangeably and out of context.

 

GDP stands for Gross Domestic Product. It is the final value of all goods and services, produced within a country, within a given time-frame, typically one year. All the countries financial transactions are contained within GDP, nothing is outside, everything in a country’s economy is included. This is what Thailand’s GDP looks like when it’s broken down by sector, which is one of the easiest and most understandable ways to display its composition.

 

  

https://www.statista.com/statistics/331893/share-of-economic-sectors-in-the-gdp-in-thailand/#:~:text=This%20statistic%20shows%20the%20share,sector%20contributed%20about%2056.69%20percent.

 

Each sector produces Goods or Services or both, each sector also imports and exports Goods and Services. Goods are products, items or substances that are manufactured or altered and made available for sale. Services are often intangibles that cannot always be seen but have value. Services contain a myriad of things that people do and sell, this includes value added activity in wholesale, retail trade, financial and professional services, education, travel, health care and real estate and more. Exports are things that are paid for using money from overseas that is brought into the country and where something is taken out of the country in return. Imports are the opposite, money from inside Thailand is paid overseas and something of value is brought back in return. International Tourism is a Thai export because the holiday in Thailand is paid for using money that comes from overseas and afterwards, the holiday experience is taken back out of the country. Thai’s who holiday abroad are engaged in imports for the opposite reason, as are fees paid for overseas education.

 

GDP represents everything in the economy that was (Purchased). sold (Expenditure) or produced (Produced). GDP can be measured in various ways by counting either the sum of all sales, all purchases or all production. Many countries, including Thailand, use a combination of counting methods to more accurately measure the various components. This is not unusual because it makes the results more reliable. For example, it’s more accurate in some parts of the economy to measure what people bought (purchased) rather than how much they were paid (expenditure). This is because people cannot always be relied on to report income fully and completely!

 

So there we have the “where”, the “what” and the “how”, next is the “who”.

 

Business or Industry produces products (Goods) and sells them in Thailand, plus it exports them overseas. In order to make products, components or materials (Goods) must often must be imported first. Some products are imported partially made and then finished before being exported. This is known as value added products which involve importing, production and exporting.

 

Consumers or House Holds buy products and use them, this is known as Consumer/House Hold consumption. But first, consumers have to pay for those products which is considered to be Consumer Expenditure. Government also spends money which is Government Expenditure. Consumers also import Services, for example, they buy goods from overseas, go on holiday overseas or send their children to school overseas.

 

Keywords

 

How - Bought, Sold, Produced.

Where - Agriculture, Industry, Services.

What - Products, Services.

Who - Consumer, Industry, Government.

 

There is a another layer of GDP that involves investment, both private and government. I’ll leave this for a future post so as to minimise complexity.

 

A Simple Example of How Money is Allocated

 

A foreign tourist arrives in Thailand on holiday and begins to spend money, which is classified within GDP as an Export of Tourist Services. The money that tourist spends is income for businesses large and small, including the hotel, restaurant and travel industries. Ultimately, the money ends up in the hands of Thai consumers who in turn will spend that money in order to live. Consequently, consumer consumption and expenditure increase. The more tourists there are, the more Consumer Expenditure will benefit. From a GDP perspective, revenue earned from the tourist has increased exports, increased consumer consumption and increased consumer expenditure.

 

Another Example

 

Let’s say the Thai consumer needs to borrow money. That borrowing is reflected in GDP, not as a consumer loan but as increased income by the financial institutions that made the loan. The value of the loan will be reflected in the total of all consumer loans which will then be compared to GDP as a percentage. But this type of private lending is not a part of the consumer side of GDP.

 

And a Third

 

Thai parents send their children to school overseas, which is regarded as an import of educational Services. Foreign tourists visit Thailand and this is an export of tourism Services. A factory sells boxes of widgets to the UK, which is an export of Goods. The local supermarket buys tins of baked beans from the USA which is regarded as the import of Goods.

 

The sum total of all imports and exports are netted and produce the Net Exports figure that is important to the value of GDP and also displays the balance of trade.

 

It helps to think of GDP as a massive pool of accounting data that can be rearranged at will, and when viewed from different angles, produces all manner of statistical information. When GDP is compiled using the expenditure method, the formulae for it is as follows:

 

GDP = Business & Investment + Households & Investment + Government + Net Exports.

 

The following link is from NESDC and explains 4Q22 GDP and forecasts 2023, the tables in the document may help some better understand what I’ve written above.

 

https://www.nesdc.go.th/nesdb_en/article_attach/65Q4%20Press%20Eng%20Q4-2022%20(2102%2015.46).pdf