What is GDP (Gross Domestic Product)

 

Gross Domestic Product

Gross Domestic Product (GDP) is a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.

  

GDP is the market value of all final goods & services produced within a country in a given period of time

• Goods are valued at their market prices, so:
• All goods measured in the same units (e.g., Rupees in India)
• Things that don’t have a market value are excluded, e.g., housework you do for yourself.

GDP is the market value of all final goods & services produced within a country in a given period of time

• Final goods: Intended for the end user  
• Intermediate goods: used as components or ingredients in the production of other goods  
• GDP only includes final goods—they already embody the value of the intermediate goods used in their production.
• GDP includes tangible goods (like DVDs, mountain bikes, beer)
• GDP includes intangible services (dry cleaning, concerts, cell phone service)

GDP is the market value of all final goods & services produced within a country in a given period of time

• GDP does not include value of goods and services produced outside the country, even if they are locally consumed. 
• GDP measures the value of production that occurs within a country’s borders, whether done by its own citizens or by foreigners located there

GDP is the market value of all final goods & services produced within a country in a given period of time

• GDP includes currently produced goods, not goods produced in the past
• It usually factor for a year or a quarter (3 months)

Key Pointers

• It is the most commonly used measure of economic activity.
• The first time concept of GDP was invented at the last of the 18th century. 
• The modern concept was developed by the American economist Simon Kuznets in 1934 and adopted as the main measure of a country's economy at the Bretton Woods conference in 1944.
• It represents the total monetary value of all final goods and services produced within a country during a period of time (typically 1 year).
• The calculation of a country’s GDP consists of all the private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs, and the foreign balance of trade.
• In India, GDP estimates are published by the Central Statistical Organization (CSO)

Types of GDP

Nominal GDP

• It is an assessment of economic production in an economy that includes current prices in its calculation. 
• It doesn’t strip out inflation or the pace of rising prices, which can inflate the growth figure.
• It is evaluated in either the local currency or U.S. dollars at currency market exchange rates to compare countries’ GDPs in purely financial terms.
• It is used when comparing different quarters of output within the same year. 
• All goods and services counted are valued at the prices that those goods and services are actually sold for in that year. 
• When comparing the GDP of two or more years, real GDP is used. The removal of the influence of inflation allows the comparison of the different years to focus solely on volume.
• Nominal GDP is an assessment of economic production in an economy but includes the current prices of goods and services in its calculation.
• GDP is typically measured as the monetary value of goods and services produced.
• Since nominal GDP doesn't remove the pace of rising prices when comparing one period to another, it can inflate the growth figure.

Real GDP

• It is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year but expressed in base-year prices
• It makes comparing GDP from year to year and from different years more meaningful because it shows comparisons for both the quantity and value of goods and services.
• It is calculated by dividing nominal GDP over a GDP deflator.