Real Effective Exchange Rate - REER

Finance Allah Shmoop What are gross domestic product GDP and

gross national product GNP So how do you know how

great your country is Well you can measure how many

missiles you have or you can count the number of

Olympic gold medals You've one or you can count the

number of Starbucks locations you have all over your country

for you can measure the strength of your economy Well

how do you do that Economists used to main measures

One is called gross domestic product called gross national product

Gross domestic product might sound like what happens when you

flush a baby alligator down the toilet And three years

later it crawls back out looking for its mommy But

in actuality it represents the total value of all the

stuff you make in your country along with all the

services you provide You know like legal services and dental

cleaning services and stuff like that And you know that's

provided by your citizens There You live on the sovereign

island nation of squish squad Scary Located just offshore of

Norway you are one of twelve inhabitants and all of

you fish for herring all day Each of you catch

an average of ten pounds of herring every day Hearing

sells for about ten bucks a pound and everyone works

two hundred days a year so multiply that all up

and you get twelve People work in two hundred days

a year each each catching ten pounds each day with

each pound selling for ten bucks And well you could

say the GDP of squish squad Scary is two hundred

forty thousand dollars That's the value of all the stuff

you're country made in a year Meanwhile elsewhere in the

world the numbers get a bit higher For instance the

GDP of the U S was about nineteen trillion dollars

in two thousand seventeen so Well yeah that's a little

bit more But of course the U S has three

hundred twenty five million ish people in it instead of

the twelve squid squid aeons And its GDP includes things

like airplane manufacturing and high value financial transactions And you

know shmoop subscription sales instead of just herring fishing So

it makes sense that the U S economy would be

much much bigger toe Look at how an economy is

doing People usually watch how it changes over time say

one of your fellow squish Quaid Ian's starts fishing with

dynamite Well it's a new technique Output goes from ten

point today to twelve next year With the new output

your GDP goes two hundred eighty eight thousand from the

two forty and change before That's twenty percent GDP growth

in a year We'll guess what big complex economies like

the US pretty much never see growth rates like that

Economists usually consider it a healthy growth rate to be

more like two or three percent in a given year

Smaller countries and developing countries can have bigger growth rates

Right Like take China It's a big country biggest population

in the world with no more than a billion and

a half people But it's still racks up relatively high

GDP growth rates because of the rapid expansion of its

manufacturing base Right they optimize their farmers and take them

from growing turn ups and instead have them assemble semiconductors

and stuff like that way higher margin to sell a

semiconductor than a turnip As recently as two thousand ten

China put up annual GDP growth rates still in the

double digits like ten percent and hit double digits and

change for five consecutive years in the early two thousand

Well GDP doesn't always go up in nations around the

world The year after discovering dynamite fishing swish squad Ian's

suffered a Siri's of significant storms The number of work

days went down from two hundred to one ninety Everything

else stayed the same self In that year GDP fell

to two hundred seventy three thousand and change from the

two eighty eight It was the year before decline of

five percent Well he kind of is called that decline

a contraction if a contraction happens for two or more

quarters in a row so like two three months periods

in a row the country is considered to be in

a recession If the contractions air deep enough and last

long enough well then that's called the depression like it

goes on for a year Two years or three years

Both GDP and GNP measure the economic output of a

country but they used different definitions about what all that

entails Gross domestic product consists of all the products and

services made it given your inside the country So you

know made within the borders of the country made domestically

gross national product measures the stuff made by people or

companies from a country regardless of where it was actually

made like you're an American citizen No building pots or

pottery in Mexico We found that in the GNP number

so GDP tracks where it was made GNP tracks Who

made it So if an American it's a toilet cozy

while sitting in his living room in Des Moines that

gets included in both GDP and GNP However if an

American goes on vacation Teo Cameroon and it's a toilet

cozy in his hotel room there well that's included in

GNP but not in GDP was made by an American

but not in America Well meanwhile if the American comes

back home to Des Moines and a Scottish friend of

his comes over and it's a toilet cozy for him

that would count in GDP but not in GNP right

The toilet cozy was made in the US but not

by an American In the old days like before the

nineteen nineties GNP was typically used to track national economic

growth However with the dramatic rise of globalization around that

time GDP became much easier to track Eventually it became

the go to measure of growth to review Both GMP

and GDP track national economic output They both look at

the amount of goods and services produced by the country

though they have different working definitions about what that means

The size of GDP and GNP are impacted by the

size of a country In the level of economic and

technical sophistication Big complex economies like the US usually aspire

to modest growth like two or three percent smaller Countries

in developing economies can post much higher growth rates with

percentages in the double digits Not being all that uncommon

GDP measures the value of stuff produced within a country

regardless of who makes it GNP measures the value of

stuff made by citizens of a country regardless of where

it's made So if a squish squatty and citizen were

toe float a raft into Norwegian waters and catch some

herring there While that would count on GNP on their

books but not G Meanwhile if he invited a Norwegian

friend over for a day of fishing for anything that

Norwegian caught would count on the squish Wadi and GDP

but not on the squish Claudia and G N P

if the scratch Wadi Ins were to launch a surprise

attack on Norway However wealth and all bets would be 00:06:23.518 --> [endTime] off You just have to see who is