In 2021, the Product IPortuguese Gross Domestic Product (GDP) was 211 billion euros, registering a growth of 4.9% compared to the previous year, the biggest growth since 1990. But what weight and importance does this value have for each of us?The answer can be summed up in one word: everything. The impacts of GDP on our daily lives are significant and go from the value of the installment of the house to the income of our investments and savings.
What is GDP?
O GDP (Gross Domestic Product) reflects the wealth of an economy. It is an indicator that results from the sum of all goods and services produced within a country by individuals and companies, resident or not in that country. In other words, it does not matter the nationality or residence of the producer, it only matters that the wealth has been generated within Portugal.
GDP is different from GNP (or GNI)
Both GDP and the GNP (Gross National Product) also called GNI (Gross National Income) are economic indicators of a country. But nevertheless, are different.Thus, the Portuguese GNI is the value of goods and services produced in Portugal and abroad, by individuals or companies resident in Portugal.That is, the GNI measures the wealth produced (in Portugal and abroad) by residents in Portugal and the GDP a measures the wealth produced in Portugal, which is the most important for the development of the economy. let’s see an example. Company X is a multinational that made investments in a factory in Portugal. The income obtained in that factory is counted in the calculation of the GDP, but not of the national income. Company Y is Portuguese, but invested in a factory in Poland. Income earned in Poland is recorded in GNI but not in GDP.
How is GDP calculated?
There are several ways to calculate GDP, namely:By supply or production – GDP is obtained by adding up the production of the different branches of activity, valued at basic prices, minus the intermediate consumption necessary to obtain it, plus taxes net of subsidies on productsBy demand or expense – GDP is obtained by the sum of private consumption (the sum of final consumption expenditure of resident households and of non-profit institutions serving households), public consumption (i.e., public administration expenditures), investment and exports net of importsby income – GDP is obtained as the sum of employee remuneration, taxes on production and imports net of subsidies and the gross operating surplus. Whichever method is used, the value will always be identical. The most usual and easiest method is the search or expense method. GDP would then be calculated by the following formula:GDP= C + P + I + (EXP-IMP)Where:C= private consumption. It accounts for all goods and services purchased by the end customer. Note that when it rises it means that there is confidence in the economy, when there is uncertainty about the future this value goes down.P = Public consumption. It encompasses all expenditure made by the State on goods and services, such as education, transport, health.I = investment. It encompasses all investments made that translate into future benefits. It encompasses investments in machinery, equipment, factories.EXP – IMP = trade balance. It encompasses all sales of goods and services produced in Portugal that are sold abroad, deducting purchases of products produced abroad. The value will be positive, that is, the trade balance will be positive, if exports exceed exports. Otherwise, it will be a deficit.
GDP and the shadow economy
Looking at the formula, you can consider that the GDP does not cover all economic activity. This is because in addition to the real economy there is the shadow economy. Since there are economic agents that do not report their activity (or only partially), for whatever reason, namely for tax reasons. under-reported activities known as the “Unobserved Economy” (ENO)are also included in GDP, as their calculation not only takes into account officially reported data, but also other adjustments in order to include the informal or even illegal economy, such as drug trafficking, and tax evasion.
Importance of GDP per capita
GDP is a global number, but does not measure the quality of life of a country.To measure the development of a country uses GDP per capita. That is, the value of GDP divided by the number of inhabitants of this country. In Portugal, GDP per capita in 2021 was €20,530, registering a rise of 5.7% compared to 2020, but still being the seventh worst in the European Union.
GDP and our daily lives
O GDP increase brings an improvement of our economy and, with that, changes in our daily lives.
The development of the economy leads to a increase in private consumption. Which in turn leads to an increase in the economy. In other words, it is a circle, but it can lead to an increase in inflation. economy growing household incomes increase leading to an increase in their spending. That is, an increase in demand. This increase in demand leads to an increase in production. If the two forces grow in parallel, everything remains in steady growth, but if demand is greater than supply, a price increase will occur, that is, we will experience inflation.As general increase in inflationfamilies tend to reduce expenses (low consumption), the economy tends to slow down and GDP to fall.Also read: What impact does rising inflation have on our daily lives?
If inflation occurs, interest rates tend to increase, as a way of containing inflationary pressures. And with that, for individuals, the credits become more expensive, namely the installment of the house.
When the economy is growing, this phase is seen by companies as the time to bet and invest. So, while there are no inflationary pressures, investment tends to rise.
One increase in GDP can lead to an increase in the profitability of your savings. To do so, it is sufficient that the rates of return are indexed to this economic indicator.For example, the interest rate on Treasury Savings Certificates (product of State savings for individuals) is indexed to GDP growth from the 3rd year onwards. plus a premium corresponding to 20% of average real GDP growth at market prices in the previous four quarterss, as long as the average real GDP growth is positive being capped at a maximum of 1.50% each year. Also read: Should I rescue my investments before they fall any further?