Gross Domestic Product (GDP)


Gross Domestic Product (GDP)

GDP is an estimated value of the total worth of a country’s production and services, within its boundary, by its residents whether nationals and foreigners, generally calculated over for one year or some specified time period.

It can also be understood as production within boundaries of a country irrespective of production & services by its citizen or foreigner.

Usually GDP is calculated over a period of one financial year, but analysis can be done of short and long term trends which can be used for economic forecast. Gross Domestic Product can also be calculated on a per capita (or per person) basis to give a relative example of the economic development of nations.

Gross National Product & Gross Domestic Product

GDP is one of the most widely used and accepted measure to compare a country’s economic growth over a period of time and to compare the economic strength of different countries.

It is governed by 3 approaches –

  • Production (or output) approach –  It is the sum total of market value of final goods and   services produced in a country during 1 year.
  • Income approach – The sum total of incomes of individuals living in a country during 1 year.
  • Expenditure approach – All expenditure incurred by individuals during 1 year.

 

Calculation of GDP

GDP of a country is defined as the total market value of all final goods and services produced within a country in a given period of time (usually a calendar year). It can also be regarded as the sum of value added at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time.

By expenditure method:

GDP = C + I + G + (X-M)

Where C: Consumption
I: Investment
G: Government Spending
X: Export
I: Import

 

By income method:

GDP = R + I + P + SA + W

Where R: rents
I: interests
P: profits
SA: statistical adjustments (undistributed corporate profits, dividends)
W: wages

By Production method:

  1. Estimate the Gross Value of domestic Output out of the many various economic activities;
  2. Determining of the intermediate consumption, i.e., the cost of supplies, materials and services used to produce final goods or services; and finally
  3. Deduction of intermediate consumption from Gross Value to get the Gross Value Added.

Criticism

Some economists say that GDP is a faulty metric because it don’t measure the economic well-being of society accurately. For example, it’s possible that GDP is increasing but median income decreases and poverty rate increases. GDP also doesn’t measure environmental impact of growth or sustainability. Other important metrics are being used for different growth parameters which include health of the population, infant mortality rates, and malnutrition rates, none of which are considered in GDP.

Human development index (HDI), Genuine progress indicator (GPI), Gross national happiness (GNH), Social Progress Index are some of the widely used parameters in addition to GDP.

Applications of Gross Domestic Product and Gross National Product numbers

Gross Domestic Product and Gross National Product figures are both calculated on a per capita basis to give a picture or estimate of a country’s economic development. GDP (or Gross Domestic Product) may be compared directly with GNP (or Gross National Product), to analyze the relationship between a country’s export business and local economy. A region’s GDP is one of many ways of measuring the size of its local economy whereas the GNP measures the overall economic strength of a country.

Example to differentiate GDP & GNP

E.g. if Wipro or TATA has a 100% owned unit in Norway, and that office exports US$2Billion worth of services outside Norway, then US$2 Billion will be added to the GDP of Norway. On the other hand, it will not be added to the GNP value since the export is done by a Indian company and not a Norway company.

Read about: Downside of Gross National Happiness indexGross National Product, Monopolistic Competition