What is the Gross Domestic Product (GDP)?

Have you Ever thought how an economic activity is measured in a country? And what about the resources being utilized and the production being made within a country .  Well ! There are tools. And one of the tools is GDP , the “Gross Domestic Product” . By definition “It is a measurement of the value of all final goods and services produced within a year in a country”. So in the definition we have:

  1. Final Goods and Services.
  2. Produced within a year.
  3. Production within the boundaries of a Country.

A break of definition shows that GDP only counts FINAL goods and services. Additionally it measures the production on yearly basis. Furthermore it also has the condition of counting the production that is within the boundaries of the country (See GDP Vs. GNP).

GDP a Stock or a  Flow ?

Now a stock is a quantity measured at a given point in time whereas, a flow is a quantity measured per unit of time. For Example : A person’s wealth is a stock while his income and expenditure are flows. Now GDP too, is a Flow, it tells how much money (dollars/rupees etc) are flowing around the circular flow per unit of time. But remember stock and flow are interrelated, because it is the flow that accumulates that as a result makes a stock. Just like the flow of income that you receive out of which you save for your wealth which is a stock.

GDP Formula

The most simple formula for GDP is :

Price of Product1 x Quantity of Product1 =Nominal GDP1    Whereas,

Price of Product of Base year x Quantity of Product of Current year = Real GDP

Approaches of measuring GDP

  1. Expenditure Approach
  2. Income Approach
  3. Product Approach

Expenditure Approach

One of the common approaches of calculating GDP is expenditure approach. by Formula it is :

 

gdp formula

  • Consumption by the households
  • Investment by the businessmen
  • Government Expenditure by the State
  • Net exports includes the goods produced within the country(export) minus the good being taken from  other countries (import).

Income Approach

A simple approach of measuring GDP. Which calculates all the income received from the factor of production i.e;

  • Rent from Land
  • Wage from Labor
  • Interest from Capital

An amalgamation of all these equals the value of all income received which in other words is GDP (measures in Dollars/rupees) of a country.

Product Approach

The product approach includes the value added concept which is the value of firms output  less the value of the Intermediate Goods that the firm  purchases. By intermediate Goods, we mean the goods that are used for further production which is not counted in GDP. GDP does not counts such goods because it creates the problem of double counting. Double counting means that we are counting a product more than once .So the value added approach helps us eliminate this problem of Double counting.

There is one thing common about all these approaches. All provides the same answer when calculating the GDP. Any 3 being used for the same data should come up with the same answer in all approaches.