Understanding the national economic situation with GDP

The best indicator of a country’s economy is GDP. GDP is the Gross Domestic Product. That is, all products must be produced in domestic. If foreign companies produce products domestically, this is not included in GDP. In other words, GDP stands for Gross Domestic Product and is an index that contains the concept of territory.

GDP has three aspects: production, consumption, and distribution. This means that calculating GDP is the same as adding all the added value produced in the country or summing up the consumption. This is possible because the product is eventually consumed and distributed to someone.

Consumption, Investment and Inventory

Consumption can be divided into two categories: private consumption and government consumption. In other words, these two types of consumption are the most common consumption items in the national economy.

The government purchases and consumes goods through the Public Procurement Service. Also, if the economy becomes difficult, the government will open up fiscal policies to boost consumption and make the economy run smoothly.

Investments are typical for construction and equipment investments, and investments can also be included in consumption. For example, if a construction company builds a building, it will buy and consume cement, rebar, and gravel. This consumption behavior can be called construction investment. If you build a factory and buy a machine for production, this is a facility investment.

Another consumption is overseas consumption. Domestic goods are consumed domestically and remaining goods are exported. It can be thought that domestic products are consumed overseas.

On the contrary, if there is a shortage of goods made in domestic, it will be imported from overseas and consumed. In this case, you should subtract from the calculation of GDP because you are not consuming goods produced in the country. For example, if you have 10 billion exports and 4 billion dollars in imports, the net exports are 6 billion.

Inventory refers to the goods left over after they have been produced in the private sector and consumed in the private sector. Of course you can export, but if you have goods that are not sold, you can say that it is in stock.

The inventory that the company has is included in the investment item, because it is made in advance to be sold later.

Including consumption, investment, and inventories, you can organize your GDP as shown below.

GDP = consumption + investment + net exports

General Outlook: strong private sector demand growth, constrained by low productivity growth

What is important here is the consumption, investment and net exports that make up GDP.

In the United States, private consumption accounts for 70%. In other words, private consumption must be revived in order to increase GDP in the United States. On the other hand, China, an emerging growth country, accounts for about 35% to 40% of private consumption. In China, investment is a big part. Because of this, China may have a difficult economic situation if the construction industry or facility investment dies.

In China, we are striving to increase private consumption while reducing the portion of facility investment because private consumption is the most stable part in the long term.

What about Korea? Private consumption is around 50%. It is middle level between USA and China. In order for Korea’s GDP growth rate to rise, the manufacturer’s facility investment should revive and the global consumption should be alive and the export should continue.

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