Gross Domestic Product (GDP) is the market value of all goods and services produced within a country in a given period. GDP can often be looked at as the total value added of every business in an economy. GDP is also an indicator of the living standard of a country. Usually, GDP is basically comparing a country’s economy yearly. For example, if a country’s year-to-year GDP is up 5%, this could mean that the country’s economy has grown by 5% over the previous year. GDP was first developed by Simon Smith Kuznets for a US Congress report in 1934. Simon Kuznets was a Russian American economist and worked at the Wharton School of the University of Pennsylvania. GDP is a very extensive economic data and it is usually watched carefully. It is used in the United States of America by the White House and Congress to prepare the Federal budget and used by Wall Street to indicate the economic activities. The business community also use GDP when preparing forecasts of economic performance that provide the basis for production, investment, and employment planning. Real GDP vs. Nominal GDP
GDP is calculated by using the market value of final goods and services produced in a country within a financial year. However there are difficulties in comparing the market value of GDP by year to year because the market value is measured by money and money could have inflated or deflated in the current year compared to the previous year. To avoid this problem from happening, GDP is deflated when prices rise and inflated when prices fall. This GDP is called nominal GDP which is not adjusted for inflation or deflation. A GDP which has been inflated or deflated to reflect the changes in the market price is called real GDP or adjusted GDP. Measuring GDP
The economists have figured out three ways to measure GDP.
1)The expenditure approach
2)The income approach
3)The product approach
The expenditure approach
Among these three methods, the expenditure method is thought to be the most basic one. This method calculates GDP by adding up the four types of expenditures. The formula is; Y = C + I + G + NX(X – M)
Y = Gross Domestic Product
C = Household Consumption
I = Investment
G = Government spending
NX = Net exports
X = Exports of goods and services
M = Imports of goods and services
Consumption consists of private households’ final consumption expenditure and it is the largest component in the economy. Consumption is calculated by adding up durable goods, non-durable goods and services. For example, food, rent, clothes, medicines, petrol, etc. Buying a new house is not included in consumption. Investment includes the new purchase for a business but doesn’t include exchanging the existing assets. For example, buying new machinery or software or equipment for the business are the investments. A private household buying a new house also goes under this category. Investment in GDP doesn’t include the financial products such as bonds and stocks. These products are called ‘saving’ to avoid double-counting. Government spending is basically the government’s expenditure. It includes all the final goods and...