GM. This is Micro Digest, the newsletter that makes you sound smart in front of your date.

We're like Barney from HIMYM.

Chances are everyone has seen the news where XX country is expecting some arbitrary number in growth in GDP. 

But what does that actually mean? What even is GDP and is it important?

Well, that's what we're going to find out in this week's ONE THING 👇

What is GDP (Gross Domestic Production)?

• GDP is a measure of the total amount of economic value produced in a country
• And what exactly is economic value?
  • We measure economic value by how much people pay for stuff
  • So if I pay $100 for a book then GDP goes up by $100. If the government spends $100M for a ship then GDP goes up by $100M (assuming that $100M doesn't end up in someone's pocket *cough*)
• Now an easier way to think about GDP is that it's just a measure of people's income because whenever you spend a dollar, someone else makes a dollar of income
• If you spend $100 on books, some of that goes to the delivery man, the author, the government via taxes etc.
• So theoretically, if we add up all the wages, profits, rental income, interest income, and taxes earned by the people in a country, that total should just be the same as GDP!

Now oftentimes, when we see GDP being compared between countries, it's actually GDP per capita - GDP per person. Why is that? Why would we care about GDP divided by the population?

• The easiest way to measure people's living standards is by measuring the median household income. 
• But since you can't go door to door and ask people how much they earn, the simpler way is to measure per capita GDP

But is per capita GDP really a good measure of living standards?

• For developing nations, the answer is yes. Kinda
• The thesis behind this is simple. Take food for example. everyone eats food, when we looked at calorie consumption per person, we can start to see a pattern - a linear pattern
• The same thing can be said with life expectancy and literacy

Now besides measuring human beings' basic well-being - food, health, education etc., looking at countries' GDP per capita gives you a picture of which countries seem to have become more materially wealthy and technologically advanced.

In fact, Malaysia is not doing that bad but we could definitely do better.

So why do I keep saying that GDP per capita is a good measure of living standards in developing countries? Well because GDP only covers the basics. 

Once people get a decent place to live, decent transportation and all of their basic needs covered, things like leisure time, work-life balance, healthcare and inequality become more important and those things aren't measured in GDP. That's why for rich countries, you have to look at a bunch of other measures to get a clear picture of what’s happening.

Before you go...

• Check out issue #43 where we talked about how did the Asia boom start and why wasn't Malaysia part of it?  🐯
• Follow us on Twitter
• Have any friends or colleagues that would be interested in this issue? Forward them this email!
• You could also read past issues here

Let's Connect

If you like this sort of stuff, please do follow me on Twitter (@hong_1011).

If you would like to chat about something or rift ideas with me, don't hesitate to DM me, I reply to every message.