The widespread measure of the total output in a country’s economy is called GDP (Gross Domestic Product). GDP is basically a measure of the market value of all services and final goods produced in a country during a year. It as well is equal to the sum of the value added to the product at every phase of production by all the industries within a country, plus the taxes and subtraction of the subsidies on products, in the period of a year. It is also equal to the total amount of the income generated by production in a country in a year. We will find that there are two ways to measure GDP
• Nominal GDP : Measured in actual market prices means the inflation factor is not involved in nominal GDP.
• Real GDP : Calculated on constant or unvaried prices.
Real GDP is the most widely used measure of output of an economy; it provides a carefully monitored pulse of any nation’s economy. Even though, short term fluctuations may occur at different occasions regarding the business cycles, but advanced economies generally show a steady hand at long-term growth in the real GDP which also results in an improvement in the living standards, the process is termed as “Economic Growth”. There is a term in economics “Potential GDP”: which signifies the maximum sustainable level of production that the economy can produce. Inflation tends to rise when the total output surpasses potential output, and if the opposite happens and the total output is less than the potential output, then it leads to unemployment.
Potential output is usually determined by the economy’s productive capacity, which depends upon the inputs available i-e capital, labor, land, entrepreneurs etc. and also the economy’s technological efficiency. Due to the fact that inputs such as labor, capital and the technological level change quite slowly, the affect of these factors on the potential GDP is steady growth.
The formulae for calculating a country’s GDP:
GDP = C + I + G + (X − M)
Components of GDP
Following are the components to measure the Gross domestic product.
It usually denotes the private consumption, such as the household expenditures (food, rent etc)
This is the amount that firms and some households invest as capital. Such as spending of households in making new houses, business firm doing a construction on a certain field for its business operations.
Government Spending (G)
It is the sum of government expenses regarding the services and the final goods, which mainly includes purchase of military arms and weapons, public servant salaries and investment of the government in any field.
GDP calculates the amount a country produces, that include goods and services produced for any other nations’ consumption, due to the surplus amount that has been produced after which therefore exports are added.
Since imported goods will be included in terms like G, I, or C, it is of vital importance that export must be deducted in order to avoid counting foreign supply as domestic.
GDP VS GNP
GDP is the total value of good and services produce in the country whereas GNP is total value of good and services produce in the country and also add the value of commodities produce by the people of the country in foreign.
Methods of Measuring GDP
Gross domestic product is measured using three methods as mentioned below.
The Expenditure Approach – The sum of total spending on producing good and services, GDP using this method can be calculated by sum up consumption, Government spending,Invest and exports deducting imports.
The Income Methods – Measuring GDP by Calculating the income of people who are responsible for producing the good and services.
Product Approach – Total value of product and services product in the country.