What is GDP?

GDP or Gross Domestic Product is a macroeconomic indicator that shows the value of final goods and services produced during the year. GDP does not include the value of intermediate goods (goods used as raw materials or semi-finished products for the production of other goods) nor transfer payments (e.g., social assistance).

We express gross domestic product in monetary units and only those products and services that are complete and ready for immediate consumption. When calculating the gross domestic product, the market value of the elements is usually taken into account. Economists divide consumers of these completed or final products and services into four basic categories:

  1. private sector consumption
  2. public spending
  3. gross investment
  4. net exports

Understanding Gross Domestic Product (GDP)

The measurement of a country’s GDP covers all private also a public consumption. Government outlays, investments, additions to private inventories, paid-in building expenses, and the international trade balance.

Of all the components that make up a country’s GDP, the international trade balance is extremely significant. A nation’s GDP tends to rise when the entire value of goods and services that domestic producers sell to foreign countries exceeds the total value of foreign goods and services that local consumers buy. GDP can be estimated on a nominal basis or a real basis, the latter accounting for inflation. Overall, real GDP is a better technique for expressing long-term national economic success as it utilizes constant dollars.

notebook-with-toolls-notes-about-gdp

GDP formula

Furthermore, in economics, the end customers of products and services are classified into three main groups: families, companies, and the government. Gross domestic product (GDP) is calculated—known as the expenditure approach—by summing the expenditures made by those three types of consumers. Accordingly, we define GDP using the following formula:

GDP = Consumption + Investment + Government Spending + Net Exports 

or 

GDP = C + I + G + NX

History of GDP

The history of the idea of GDP should be differentiated from the history of changes in numerous techniques of calculating it. The value contributed by companies is generally straightforward to measure from their records. In contrast, the value generated by the public sector, financial industries, and intangible asset creation is more difficult. These activities are increasingly significant in industrialized economies, and the international agreements regulating their measurement and inclusion or exclusion in GDP periodically alter to keep up with industrial developments. In the words of one academic economist, “The actual number for GDP is, therefore, the outcome of a huge patchwork of statistics and a sophisticated series of processes carried out on the raw data to fit them to the conceptual framework.” [15]

GDP became genuinely global in 1993 when China formally accepted it as their gauge of economic performance. Previously, China has depended on a Marxist-inspired national accounting system. [16]

Components of GDP

We can calculate it through the essential components of consumption, investment, government procurement, and net exports.

  • We define consumption as the use of goods and services in the household.
  • Investing is not just about buying stocks, bonds, and assets. It is more related to procuring some crucial assets for businesses and companies such as equipment, residential housing construction, and inventories.
  • Government is how the government procures all the necessary resources to produce goods and services through the private sector.
  • Net exports represent the profit that a state makes by selling assets and goods outside that state. It is essential to mention that we should not include imports in that calculation.

Types of Gross Domestic Product

Nominal GDP

Nominal gross domestic product is gross domestic product (GDP) evaluated at current market prices. GDP is the monetary worth of all the products and services generated in a country. Nominal varies from real GDP in that it incorporates changes in prices owing to inflation, which represents the pace of price rises in an economy.

Real GDP

Real gross domestic product (real GDP) is an inflation-adjusted statistic representing the value of all goods and services generated by an economy in a given year (expressed in base-year prices). Sometimes it refers to as constant-price inflation-corrected GDP or constant dollar GDP.

GDP Per Capita

Per capita gross domestic product (GDP) is a financial measure that breaks down a country’s economic output per person and is taken by dividing a nation’s GDP by its population. Per capita GDP is a worldwide metric for evaluating the wealth of nations and economists use it to examine the prosperity of a country based on its economic growth.

GDP Growth Rate

The GDP growth rate analyzes the year-over-year (or quarterly) change in a country’s economic production to determine how rapidly an economy is growing. Usually stated as a percentage rate, this metric is attractive for economic policy-makers since GDP growth is strongly related to important policy goals such as inflation and unemployment rates.

GDP Purchasing Power Parity (PPP)

While not a direct measure of GDP, economists use purchasing power parity (PPP) to see how one country’s GDP compares in “international dollars” using a method that accounts for differences in local prices and living costs to make cross-country comparisons of real output, real income, and living standards.

Measurement of gross domestic product

If we look at GDP as a flow of production, then it consists of:

  1. Consumption of individuals and households (C)
  2. Consumption of enterprises (I)
  3. Country consumption (G)
  4. Consumption of foreigners (X)

GDP (GNP) = C + I + G + X

If we look at GDP as a revenue stream, it then consists of:

  1. Wage (W)
  2. Interest (s)
  3. Annuities (R)
  4. Profit (P)
  5. Depreciation (D)
  6. Indirect taxes (T)

GDP (GNP) = W + i + R + P + D + T

Importance of GDP

Of course, GDP is not the ultimate and the only indicator that matters, nor do economists use it as such. But it correlates VERY well with other indicators of well-being, both objective and subjective.

The fact is that there is no reasonable alternative in terms of indicators that would reflect so well the general state of an economy. Over time, many options tried to develop something that would replace or upgrade it without losing the combination of simplicity and good predictability.

GNP vs GDP

Although usage of GDP is frequently a statistic, there are alternative ways to measure a country’s overall value-added generated economic growth. While GDP tracks economic activity inside a country’s physical boundaries (whether the producers are local to that country or foreign-owned enterprises), gross national product (GNP) reflects the total output of individuals or businesses native to a country, including those based overseas. GNP does not include foreigners’ domestic production.

FAQ

What Is a simple definition of GDP?

The GDP is calculated as. The value-added is the difference between the value of products and services produced and the value of goods and services required to produce them, also known as intermediate consumption.

Which country has the highest GDP?

The United States has the largest GDP, according to the International Monetary Fund.

Is a high GDP good?

GDP is significant because it provides information on the size and performance of an economy. The rate of increase in real GDP is frequently used to measure the overall health of the economy.

The GDP bottom line

A country’s GDP can only express a very limited range of information about that country’s economy in a single numerical figure. Despite this, it remains a valuable source of information for economists and investors.

Other calculators

Growth rates can be computed in a variety of methods, depending on the purpose of the figure. A simple growth rate is calculated by dividing the difference between the ending and starting values by the starting value, so visit our GDP Growth Rate Calculator to calculate it. Also for more calculators in math, physics, finance, health, and more, visit our CalCon Calculator official page.