What is GDP

Posted on November 27, 2009 | What at mybiginfo.com | What is GDP | | View all What | |

The gross domestic product (GDP) or gross domestic income (GDI) is a basic measure of a country’s overall economic performance. It is the market value of all final goods and services made within the borders of a country in a year. It is often positively correlated with the standard of living,though its use as a stand-in for measuring the standard of living has come under increasing criticism and many countries are actively exploring alternative measures to GDP for that purpose.

GDP can be determined in three ways, all of which should in principle give the same result. They are the product (or output) approach, the income approach, and the expenditure approach. The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people’s total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors (“producers,” colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers’ incomes.

Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total.

The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.

As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It’s not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.

The monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

GDP = C + G + I + NX

where:

“C” is equal to all private consumption, or consumer spending, in a nation’s economy
“G” is the sum of government spending
“I” is the sum of all the country’s businesses spending on capital
“NX” is the nation’s total net exports, calculated as total exports minus total imports. (NX = Exports – Imports)

GDP Vs GNP

GNP counts the earnings in the homeland of the owner of the asset, while GDP counts the earnings of a manufacturer in the country in which the assets exists. For the United States, there is virtually no difference between the two measures.

There are three basic components that determine the U.S. GDP:

1. Consumption, the amount that consumers pay for goods (durable and non-durable).
2. Investment, the amount of money spent on new production facilities, that is, plants and facilities.
3. Services, the amount that consumers pay for the services they use.

Several things were not included in GNP and subsequently in GDP:

* Work that is provided in an economy by nonmarket transactions such as homemakers and military personnel. These factors were too difficult for Kuznets and his team to measure.
* Illegal activities such as gambling and drug trafficing. These factors are also difficult to estimate; in addition Kuznets excluded them from GNP because he deemed them a “dis-service” to the economy.
* Goods and services that are bartered. These were excluded because they cannot be measured.
* Sale of intermediate goods (raw materials).
* Sale of used goods (used cars, furniture, etc.).
* Purely financial transactions such as sale of stocks and bonds.
* Imports (goods made outside the United States).

The GDP is the ultimate benchmark that measures the expansion and contraction of the U.S. multitrillion dollar national economy. It covers everything that is produced and sold in the marketplace. Bankers, investment brokers, and government officials use the GDP to determine such things as interest rates, investment opportunities, and tax rates. The GDP is not the only measure of output, however; economists use GDP because it is the most comprehensive of

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