Gross Domestic Product (GDP)

What is Gross Domestic Product?

The Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.

Gross domestic product is the best way to measure a country's Economy. GDP is the total value of everything produced by all the people and companies in the country. GDP includes all private and public consumption, investments, government outlays, private inventories, paid-in construction costs and the foreign balance of trade. Put simply, GDP is a broad measurement of a nation’s overall economic activity.

GDP may be contrasted with gross national product (GNP), which measures a the overall production of an economy's citizens, including those living abroad, while domestic production by foreigners is excluded. Though GDP is usually calculated on an annual Basis, it can be calculated on a quarterly basis as well.

Formula for GDP

The components of GDP are:

Personal Consumption Expenditures + Business Investment plus Government Spending plus (Exports minus Imports).

Which means:

C + I + G + (X-M)

Types of GDP

There are many different ways to measure a country's GDP. It's important to know all the different types and how they are used.

Nominal GDP

Nominal GDP is the raw measurement that includes price increases. The Bureau of Economic Analysis measures nominal GDP quarterly. It revises the quarterly estimate each month as it receives updated data.

Real GDP

To compare economic output from one year to another, you must account for the effects of Inflation. To do this, the BEA calculates real GDP. It does this by using a price deflator. It tells you how much prices have changed since a Base Year. The BEA multiplies the deflator by the nominal GDP. Unlike the nominal GDP, the adjustments in inflation are taken into account when measuring the real Gross Domestic Product. The real gross domestic product of India is estimated to be around 134.40 Lakh crore in 2020-2021. Usually, economists refer to the real GDP of the country to determine the growth of the country.

Actual and Potential GDP

Actual GDP refers to the calculation of a country’s current growth. Potential GDP, on the other hand, is used to calculate the condition of the economy under low inflation, stable currency, and full employment.

What is Gross National Product (GNP)?

GNP is calculated by adding the total value of the goods and services provided by the citizen of a particular country. The formula is also commonly used for the calculation of the output produced by the companies located abroad and within the nation. The main purpose of GNP is to find out how the citizens of the country contribute to its Economic Growth. It excludes the products and services produced by the foreign residents, and neither does it include the Income earned by the foreigners based in the country.

Formula for Calculating GDP

GDP is calculated by adding the investment, net exports, government spending, and consumption of the country.

Gross Domestic Product = Consumption + Investment, Government Spending + Net Exports

Gross Domestic Product Per Capita

As the name suggests, GDP per capita is calculated by dividing the GDP of the country by its total population. The major use of gross domestic product per capita is for analyzing the prosperity of the country. Many economists use this measure to identify the country’s wealth and prosperity by evaluating the country’s economic growth.

Growth Rate

The growth rate of GDP is the common tool used to analyze the performance of the economy for the given year. The negative GDP growth rate implies a Recession in the economy, while the too high growth rate could signal inflation. Economists use the GDP growth rate to determine the current performance of the economy.