GDP versus GPI: Examining Economic Stability and Strength

One of the best ways to reference GDP is that is reports all that is produced from a country, but it does not record all that is spent in the process of producing the said goods. The costs of actually producing a good are just as important as the value of the product. A simple input to output ratio shows this. For a potential investor, if more money is spent producing the good than revenue is earned selling the goods produced, this would not a be a lucrative investment opportunity. On the other hand, if twice as much output value were to be coming out of the input, then this would look like a very healthy investment.

On the other hand, if one is a wise investor, face value is not something that is acceptable for an investment, especially not long turn. Sure, its true you could invest your money and possibly double or double and a half your initial input into a company. However, money goes as fast as it comes, and long term investments sustain a higher rate of return. Therefore, the intelligent investor will look into the past of the firm. Under GDP, one would see that this company has $3.6million of input, and produces $7.2million dollars of output in produced goods. This looks good, no? Well, if one inquired into the history, one might find that the said firm once had an input of $1.8million and an output of $5.8million ten years ago. Again, at this face value one would think “Their output level has increased! See!? It was a grand investment!” Not so fast there, because the input level was doubled over ten years, but the output level only increased by just barely more than quarter of the initial output level. So what does that mean? It would be safe to say that over a long period of time, the level of output will be less than the level of input. Under the same marginal formulas, one could expect in ten more years an increase to $7.2million in input expenditures, and an output level of roughly $8.9million.

This is why the GDP is not the lucrative method of examining a corporates value – because it does not show how the company has improved. Even so, GPI not only calculates how much the company value is, but how far it has come, its growth rate, the value of assets and puts a value on more than just input and output – It puts a value on reputation, standards of the workplace and living when in reference to countries.