Hi all. This post is a follow up from the previous post illustrating a whole economy as a simple fish pond. In this post I would like to put that content into the context of one of the most widely known economic metrics—gross domestic product, a.k.a. GDP. I highly suggest reading the original post here first!
Our fish pond illustration is very basic—it has very little resemblance to even the simplest real world subsistence economy. However, very simple examples can help us absorb concepts that are relevant to the real economy (REAL here has two meaning—first, obviously, the real world, but also, more specifically, in economics real can mean as related to goods and services as opposed to purely financial transactions).
GDP is a common measure of the size of an economy and its component elements. Gross national product (GNP) is a related concept that is also common. The difference between the two is how you treat foreign transactions, gross national product counts all of the economic production by nationals (and assets owned by nationals) of a country, regardless of where they are in the world, while gross domestic product counts all of the economic production within a country’s domestic borders regardless of who owns the assets. Both are ways of expressing how much stuff a country produced to support its standard of living.
It is worth noting that in the specification of the fish pond model from last time, there is no difference between GDP and GNP! This is because there are no foreign interactions—everything is internal to this fish pond. The output of our fish pond economy, its GDP, is the number of new fish created in a period.
GDP can be expressed as an equation that tabulates that economic output as the sum of the uses of the output. These uses include consumption, investment, and net exports (exports minus imports). Government spending, a particular form of consumption, is often included, but we will leave it aside as we have not specified a government (yet—possibly in a future post). We can also drop net exports, because without adding foreign sector, there are not imports or exports. So, for this example we have:
GDP = Consumption + Investment
In our first case, where 10 fish produce 5 new fish, and 5 fish are consumed, consumption is 5 fish, investment is zero, and GDP is 5.
5 = 5 + 0
In our next case, we consider what would happen if we left two more fish in the pond—instead of consuming 5, we consume 3. Those two fish not consumed would be considered investment, because they remain behind to build the productive capacity of the pond.
5 = 3 + 2
It is interesting to note that in this period, it does not matter how many fish are consumed versus invested – no matter what, GDP is 5. If we consumed more than 5 fish, we would have a negative number for investment because we destroyed productive capacity. So, if we consume seven fish, we have negative investment of 2.
5 = 7-2
If the pond produced 5 fish, GDP is 5, regardless of how many we consume. When the split between consumption and investment matters is in the NEXT time period—if we invest 2 by only consuming 3, GDP will be 6 in the next period (10 original fish + 2 invested fish = 12 fish who produce 6 new fish in the next round). Likewise, in the overconsumption scenario, where 7 fish are removed from the pond, only 8 are left behind and produce 4 fish, making GDP 4 in the next round.
And that is pretty much what is in the Tiktok. Thanks for reading!
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Extending the example—
In the first Fish Pond post, I did a little bit of an extension that used a base of 200 fish instead of 10, and included bringing fish from outside (import) to further stock the pond without reducing consumption. These fish are both imports and investments. There are no exports because we did not send any fish from our pond abroad.
GDP for that first time period is still 100 fish—that is how many the economy (the pond) produced. We specified consumption of 100 fish. We either put the imported fish in the pond, or consumed them and left 20 other fish in the pond (for our scenario, there is no difference). Writing this out, GDP of 100 equals consumption of 100 plus 20 in investment plus zero in exports minus 20 of imports (100=100+20+0-20). If the other pond abroad requires future repayment for those fish, that will count as export in the future and will necessarily reduce future consumption (part of GDP will be sent abroad and not consumed).
Any real economy, or real feeling fictional economy, is much more complex than this, but everything comes from somewhere (productive capacity or imports) and ends up somewhere (consumption, investment, or exports).
ECONOMOUS 