Gross domestic product (GDP)

1944 committee working on statistical report. Source Alfred Eisenstaedt Getty Images

Gross Domestic Product (GDP) is the de-facto measure of economic activity and health of a market based economy under capitalism. It is the measure of the aggregate of all private income from households and firms. Due to the nature of exchange of money and double-entry accounting, this is also the aggregate of expenditures (also known as consumption) from households, firms and government in a closed economy. For an open economy the net trade balance is added to the total GDP. Given this dual nature of GDP, it can also be described as the rate of financial transactions or flow of money circulating in the economy (Core Economics, 2014). These financial exchanges however only measure a fraction of the total interactions in the society. Other forms of exchange may include voluntary or coercive interactions with good or bad means and outcomes such as offering advice to a friend, parenting, cheating or theft. None of these exchanges are measured by GDP although they may have positive or negative outcomes for the overall collective welfare of the society. The use of GDP as a measure of economic progress has been criticised and this incompleteness is one such criticism (Dean, 2014).

Equation 1

The production of GDP can be thought of as the combined result of five factors; the population size (P), the unemployment rate % (U), the percentage of people willing and able to participate in the economy “eligible workforce (EW)”, the average working hours per employee in a year “hours per worker (HPW)”, and the speed of output produced per hour worked “labor productivity” in units of $/hr. This way of analyzing GDP can be applied either to a particular form, industry or to the entire economy. The average wage is then the result of the labor share of GDP xlabor and the labor productivity.

Equation 2

The following is a hypothetical description of the potential relation of labor, productivity, and hours to one another based on what could logically be deduced through inspection of Equations 1 above.

Changes to GDP due to aggregate demand in the economy for goods and services can have a direct impact on the demand for labor. Another potential disruption in Equation 1 is productivity improvement and increased real wages. There are six possible outcomes from a productivity improvement :

1. Increase the unemployment rate

2. Increase the household savings rate

3. Increase non-essential consumption

4. Population growth rate reduction (decrease in net immigration)

5. Reduce hours either hours per week

6. Reduce the total % participating in the workforce.

Whereas the increase in investments and non-essential consumption increase the aggregate level of GDP, returning the surplus as fewer hours worked results in a constant level of GDP. Where this does not push precarious individuals over the edge into poverty, some households may prefer the extra discretionary time over more consumption. The average hours per week on average has dropped in OECD countries to 30-35 hours per week since the post-war era (OECD, 2020) however Singapore and the United States are exceptions and they still maintain high working hours 40-45 hours per week (Singapore statistics, 2020).

Regarding the last condition of reduced % workforce participation - there are three potential means for achieving that end which are complimentary to human capital development - increased social benefits for early retirement, increase the mean years of schooling by funding higher education studies, and providing sabbatical opportunities for mid-career education. These types of interventions reduce the overall hours from the workforce but can potentially enhance future productivity potential.

Employment, or unemployment is a principal concern for policy makers and households since in a capitalism political economy employment is the dominant socially accepted mode for an individual to meaningfully participate in society. The question of how a particular policy will impact employment in such systems is a persistent preoccupation of policy makers and the general public. The next section elaborates into more detail on the dynamics of unemployment in the context of macroeconomics.