With the Covid-19 crisis, you may have heard everyone talking about the health of the economy, followed by the term ‘GDP’. But what is GDP?
GDP is short for Gross Domestic Product. It calculates the value of all the goods and services made in a country. Did you just get your first haircut after months of being under the MCO? The money you paid for that haircut is added in Malaysia’s GDP. Or have you bought a pair of shoes, a new phone or even your favourite sweets from the corner shop? That’s calculated in the GDP, too. So, when we spend money on anything, that’s called consumer spending and is included in the calculation of the GDP
What else is included? Government spending, like when they build roads or hospitals, investments by companies such as building factories, and exports. This calculation of everyone’s spending, also known as demand, is the most basic way to measure GDP.
How big is the economy?
The GDP is the most common way to measure the size of an economy. In 2019, Malaysia’s GDP was US$364.70 billion. The GDP of the whole world was US$87.75 trillion.
Since GDP measures everyone’s spending, the basic understanding is that the higher the GDP, the richer or bigger an economy is.
So what is GDP growth?
You may have seen headlines like “Malaysia’s GDP to grow 7% in 2021” or “Malaysia’s economy to contract 3% in 2020”. The percentage used is called the GDP growth rate and it shows the change in GDP from quarter to quarter (the three-month periods which one year can be broken into, e.g. January-March 2020 = first quarter or 1Q2020, April-May 2020 = second quarter or 2Q2020) or year to year.
So, if Malaysia’s GDP was US$364.70 billion in 2019, then a growth of 7% means the GDP has increased by 7%. A 3% contraction will mean the GDP has fallen by 3%.
Another headline that might be confusing is “Malaysia’s GDP growth to fall 3%”. Is the economy growing or falling?
Well, a positive GDP growth rate means the economy is healthy and continuing to grow, and a GDP growth rate that is negative or falling means the economy isn’t doing well. A negative GDP for two quarters in a row (e.g. If a country‘s GDP was -1% in 1Q2020 and -3% in 2Q2020), means the economy is in a recession.
But remember, even though a positive or growing GDP rate is usually good, too much growth too fast might be bad. This could cause inflation, where prices of things are rising too fast for people to afford them. Prices generally rise gradually over time, so some inflation is normal. To balance healthy economic growth, countries usually try to keep inflation at around 2%.
So, the GDP and GDP growth rate are some things governments think about when they make their plans for the economy. If they think the GDP isn’t growing enough, they might build more schools or give aid to the people. (You can also read our Blog on the OPR to understand the health of the economy). If the GDP is growing too fast, they might slow down on building infrastructure like roads, schools and hospitals. A “good” GDP growth rate will depend on each country – generally, developed countries target GDP growth of around 2%, while developing countries which are still growing would like to see growth of around 3%.
So, now you know what the GDP is and what it means when people talk about positive or negative GDP growth!