What GDP is, and How it Impacts You (Yes, it Does)

Even if you don’t pay close attention to what is happening in the economy, you’ve undoubtedly still heard people talking about GDP and whether it has increased or decreased, or as economists often phrase it, expanded or contracted. Given the jargon, it might seem like something far removed from your day-to-day life, but it really isn’t. So, it’s worth understanding what GDP is, what impacts it, and how those changes affect you.

GDP Defined

First, what exactly is GDP? Dr. Justin Robinson, a Professor of Finance and Dean of the Faculty of Social Sciences at the University of the West Indies, Cave Hill Campus, defines GDP or gross domestic product as “the final market value of all the goods and services produced” in a country. This is measured over a specific period of time, and generally that period is a year. When economists talk about economic activity, it’s GDP they are using to quantify it.

Tradeable vs. Non-Tradeable Sectors

While many different sectors contribute to economic activity in Barbados, they fall into one of two broad categories: tradeable or non-tradeable. Tradeable sectors are those that generate foreign exchange, and the largest and most well-known of these in Barbados is tourism.

To highlight the importance of tourism to our economy, Professor Robinson points to 2019, which he refers to as “the last normal year”, since Barbados’ economy, like most others, was severely impacted by the COVID-19 pandemic. He notes that in that year, tourism generated $944.1 million. Manufacturing, the second largest of the tradeable sectors generated half of that - $474.3 million.

Non-tradeable sectors, those that don’t generate foreign exchange, actually make up a larger portion of Barbados’ GDP, with “Finance and Other Services”, the largest subcategory, bringing in $2.7 billion, and distribution, the umbrella term used for wholesale and retail activities, contributing $1.2 billion.

If the non-tradeable sectors contribute more to GDP, why is there such a heavy focus on tourism and other tradeable activities?

It comes back to Barbados being a small open economy – a country with a small population that relies heavily on international trade. We need foreign exchange to purchase imports, and tradeable sectors earn foreign exchange while businesses in non-tradeable sectors such as supermarkets, stores, and construction firms use it to purchase their inventory and raw materials.

GDP Contraction vs Expansion

How the different sectors, be they tradeable or non-tradeable, perform determines whether GDP contracts or expands.

A contraction in GDP simply means that there is less economic activity, and this is because people are either buying less or companies are exporting less, or both. Conversely, an expansion in GDP means that there is more economic activity.

Economists want to see an expansion in GDP, but in particular, they want to see that increase in economic activity come from the tradeable sectors. Professor Robinson explains:

“In many countries, people are happy if they hear GDP grew by 8 percent. I think most local economists and policymakers would say ‘Okay. Eight percent growth. What’s the mix?’. Because if you had the growth coming from non-tradeables, the local economists would say ‘Oh my God, trouble coming’. Because you would be using foreign exchange.”

GDP and You

If increases and decreases in economic activity seem to have no bearing on your day-to-day life, here’s why the opposite is the case.

To reiterate, GDP contracts because people are buying less, or firms are exporting less, or a combination of the two. In those scenarios, the companies are doing less business and by extension earning less. They may determine that they either don’t need or can’t afford to keep all their current employees, which leads to layoffs. Professor Robinson uses the example of a shopkeeper who has seen a falloff in sales and decides he no longer needs to keep his shop assistant.

A slowdown in economic activity also means that Government’s revenues decrease because it collects less in taxes, VAT being an obvious example, but also income taxes should there be a significant increase in unemployment. This has implications for the average Barbadian as well, because Government’s revenue is used to finance many of the services we rely on such as garbage collection, education, and healthcare.

There are real world, individual-level consequences, as Professor Robinson lays out:

“GDP contraction hurts at the individual level in many cases, because people are seeing reduced income or unemployment. But there’s also reduced revenue for Government, and Government is a big part of our economy because it provides a lot of social services.

And that makes all this GDP talk worth paying attention to.