The recent news of the UK joining the CPTPP trade partnership has sparked a heated debate in the media. While some see it as a positive move towards expanding the country's trade, others have raised concerns about the deal's significance. The figure of 1.8 billion pounds increase to the UK's $3.1 trillion GDP has been ridiculed as insignificant, and government ministers have been accused of lying when saying the deal is worth $17.1 trillion. So, what is the real story behind these numbers, and how do we make sense of them?
First, let's take a look at the figures themselves. The CPTPP GDP, without the UK, is $14.3 trillion, making it a market bigger than the EU in terms of GDP and the number of people. However, when the UK is added to the CPTPP, the total GDP figure becomes $17.4 trillion. While this may sound impressive, it's essential to note that this number is not equivalent to the deal's value. In contrast, the figure of £1.8 billion may seem insignificant, but it's essential to understand that this is just one aspect of the deal.
It's worth examining how GDP is calculated to better understand the deal's value. GDP is a measure of a country's economic activity, specifically, the value of all final goods and services produced within a country's borders in a specific period, typically a year. GDP can be calculated using three approaches: production (or output), income, and expenditure. The expenditure approach, the most commonly used method, calculates GDP by adding up all the spending on final goods and services in a country. This includes household consumption spending, investment spending by businesses on capital goods, government spending on goods and services, and net exports (exports minus imports).
The CPTPP agreement focuses on exports and imports, which can significantly impact GDP. However, the relationship between exports, imports, and GDP is not always straightforward. For instance, equal increases in exports and imports would have negligible effects on GDP. Similarly, if imports are used to create goods for domestic consumption or investment, it might stimulate the economy and offset the initial GDP decrease from the imports. Additionally, an increase in imports could lead to an increase in other components of the GDP equation, such as consumption or investment.
It's worth noting that a trade deficit may occur if an equivalent increase does not match increased imports in exports. A trade deficit is not necessarily a bad thing for the economy, but if it persists for too long, it could lead to economic issues like currency depreciation and increased foreign debt.
While the GDP figure is an essential measure of a country's overall economic activity, it does not wholly capture the deal's value. The CPTPP agreement's impact on the UK's economy is not as straightforward as it may seem, and it's crucial to examine the deal's various aspects to understand its value better. So, before jumping to conclusions, it's essential to look at the numbers and understand the underlying maths of GDP.
Gross Domestic Product (GDP) is the sum of all goods and services produced within a country's boundaries in a specific period. It's typically calculated using the formula:
GDP = Consumption + Investment + Government spending + (Exports - Imports)
This formula implies that imports are subtracted from the GDP calculation, so increasing imports without increasing exports would reduce GDP. Similarly, increasing exports boosts GDP.
But there can be scenarios where the net increase in imports and exports may not significantly affect the GDP. Here are a few possibilities:
The proportion of each component in the GDP calculation—Consumption (C), Investment (I), Government spending (G), and Net Exports (Exports - Imports, NX)—can vary widely based on the economic structure and policies of each country.
However, in most developed countries like the United States, the proportions usually look like this:
These proportions are not constant and can shift over time due to changes in economic policies, business cycles, demographic trends, and other factors. For example, government spending might increase during a recession to stimulate the economy, while net exports might rise during a boom in global trade.
Please note that these are rough estimates and can vary significantly depending on the source and the specific time frame being considered. Always refer to the latest data from reliable sources like the World Bank or the national statistical agency of the specific country you're interested in.
To better see that GDP is not the most important economic indicator, we should take the sace of Ireland a EU nation, that joined the same as as the UK. The Irish economy may seem like a success story with a high GDP per capita, but upon closer examination, the reality is less impressive. While Ireland attracts major global corporations with its low taxes, the average Irish person does not work for these companies and instead works in the domestic economy, which is struggling with a critical shortage of housing and inadequate infrastructure and public services. This has resulted in a significant gap between the country's reported GDP and the actual wealth of its people. A survey showed that 70% of young Irish people are considering leaving the country due to their dissatisfaction with the quality of life. The Irish Miracle may be nothing more than "leprechaun economics," with the country's GDP being inflated by foreign corporations that move their profits to Ireland without contributing to the local economy. The fight against tax havens may soon expose the truth behind Ireland's economic success story.