why GDP matters

# why GDP matters - Topic 2: Why do we care about GDP?...

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Click to edit Master subtitle style Topic 2: Why do we care about GDP? PRINCIPLES OF MACROECONOMICS Dr. Fidel Gonzalez Department of Economics and Intl. Business Sam Houston State University

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Click to edit Master subtitle style Why is GDP important? During this semester we will be talking about GDP almost any class. If we are going to pay so much attention to GDP we may need to know why GDP is important. First, we need to derive a new concept: GDP per capita or GDP per person. GDP per capita: usually when we want to compare the living standard in a country we do not use just GDP but rather GDP per capita. The reason is that sometimes the GDP in two countries can be different just because one country has higher population. For example, the GDP of India is the equivalent to \$1.2 trillion USD whereas Mexico’s GDP is \$1.1 trillion USD. That is, they have very similar levels of production. Does that mean that Mexico and India have a similar standard of living? Well not necessarily, an important difference between Mexico and India is population. India has 1,168 million people while Mexico has only 105 million. Therefore, we need to account for the fact that countries have different population sizes.
Click to edit Master subtitle style GDP per capita We do this by computing the GDP per capita: GDP per capita = GDP/population Hence, from our previous example we obtain that the GDP per capita in India and Mexico may be different because the GDP per capita are very different: India GDP per capita: \$1.2 trillion/1,169 = \$1,027 Mexico GDP per capita: \$1.1 trillion/100 = \$11,000 The GDP of Mexico is about \$11,000 USD whereas for India is \$1,027. Therefore, despite having similar GDP’s when we look at the GDP per capita we observe great differences between these two countries and therefore we can also conclude that Mexico has a higher standard of living that India. What about the U.S. ?

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## This note was uploaded on 06/06/2011 for the course ECON 233 taught by Professor Fidel during the Fall '10 term at Sam Houston State University.

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why GDP matters - Topic 2: Why do we care about GDP?...

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