Recently the G20 countries met as they do annually, to discuss their respective economies and the issues between them. The G20 represents the 20 largest economies on planet earth. This begs the question, how big is the world’s economy?
The answer is, it depends. You didn’t think it was gonna be that easy did you?
How do we measure it?
The first problem we have is how do we measure the size of the economy? Generally we use a country’s gross domestic product or GDP. Gross domestic product is the total value of goods produced and services provided in a country during one year.
From the USBEA: “The value of the goods and services produced in the United States is the gross domestic product. The percentage that GDP grew (or shrank) from one period to another is an important way for Americans to gauge how their economy is doing. The United States’ GDP is also watched around the world as an economic barometer.”
GDP = private consumption + gross investment + government investment + government spending + (exports – imports).
The largest part of our gross domestic product in the United States by far is consumer spending contributing 70% of the total United States production. Business investment represents 18% of the U.S. GDP followed by government’s spending which is 17% of GDP.
Exports of goods and services have opposite effects on the gross domestic product. Import more than you export you create a trade deficit. Export more than you import and you have a trade surplus. The United States has experienced a trade deficit for many years.
But we are talking about GDP’s and the world economy, and different countries have different currency values and cost structures. To account for these discrepancies GDP by country may be modified by a factor known as purchasing power parity.
Investopedia.com defines purchasing power parity as “an economic theory that compares different countries’ currencies for a basket of goods approach.
According to this concept, two currencies are in equilibrium or at par with the same basket of goods bought in the respective country, taking into account the exchange rate.
Closely related to purchasing power parity is the law of one price, which is an economic theory that predicts that after accounting for differences in interest rates and exchange rates, the cost of something in country X should be the same as that in country Y in real terms.”
In general if you have two countries and you take the so called basket of goods and you purchase those goods in that country’s currency and then compare the two currencies by their exchange rate you have corrected for purchasing power parity.
There are a number of criticisms of PPP which we may tackle in a future article.
Where to get the data
In the U.S. GDP Data is published by the Bureau of Economic Analysis an agency of the Department of Commerce. But can any country arbitrarily measure their GDP and report it?
The answer to that is no.
There is a worldwide standard for measuring the gross domestic product of the country. The standard comes from the United Nations, to their Inter Secretariat Working Group on National Accounts.
From the UN.org “The ISWGNA creates the system of national accounts or SNA. The system of national accounts is the internationally agreed standard set of recommendations on how to compile measures of economic activity. The SNA describes a coherent, consistent an integrated set of macroeconomic accounts in the context of a set of internationally agreed concepts, definitions, classifications and accounting rules.”
In the case of this article, we’re getting the world’s GDP Data from the WorldBank.org.
What it means for your business
Investopedia.com explains, “Economic production and growth, what GDP represents, has a large impact on nearly everyone within [the] economy”.
At the point when GDP development is solid, firms increase hiring and can bear to pay higher compensations and wages, which prompts all the more spending by buyers on products and services.
Firms likewise have the certainty to invest more when economic growth is solid, and establishes the framework for monetary investment in the future.
At the point when GDP development is low or the economy goes into a subsidence, the inverse applies laborers might be paid lower wages or terminated. Firms are hesitant to make further investments until conditions improve.
So, how big IS the World Economy?
In US Dollars the world’s economy in 2018 was $80.7 Trillion dollars.
In PPP the figure is $127.6 Trillion Dollars – a discrepancy of 27 Trillion dollars or 58%.
That’s quite a discrepancy, but any way you look at it the world economy is very big indeed.