Gross Domestic Product (GDP) is the most common measure to estimate the size of a country’s economy. When evaluating how productive a country or nation is on the macro scale, few numbers are more important to understand than GDP, or gross domestic product.
What is GDP?
GDP stands for gross domestic product, which represents the total monetary value, or market value, of finished goods and services produced within a country during a period, typically one year or quarter. In this sense, it’s a measurement of domestic production and can be used to measure a country’s economic health.
• Nominal GDP accounts for current market prices without factoring in deflation or inflation, meaning it tracks general changes in an economy’s value over time.
• Real GDP factors in inflation and accounts for the overall rise in price levels, so it’s more accurate for calculating a country’s economic health.
GDP is used to measure the economic condition of any country. It is a measure of economic condition. The economic condition of the country is measured every three months. Agriculture, industry and services come under GDP. When production in these regions increases and decreases on the basis of this the GDP rate is decided.
Agriculture, industry and services are the three major components of GDP. The GDP rate is fixed on the basis of the average increase or decrease of production in these areas.
How does GDP come out? How is GDP generated?
•GDP = Private Consumption+ Gross Investment + Government Investment + Government Expenditure (Export – Import) GDP
•Inflation is measured using this formula. To calculate this, real GDP is divided by the unrealized (nominal) GDP and multiplied by 100.
•GDP = C + I + G (X – M)
•C means – Consumption (all private consumer spending within the nation economy)
•I mean – The sum of country’s investments
•G means – Total government expenditure
•X means – Country’s total exports
•M means – Country’s total import consumption.
1. Consumption (C):
COMPONENTS OF GDP:
Consumption represents the sum of goods and services purchased by citizens—such as retail items or rent—and it grows as more is consumed. It’s the largest component of GDP. Typically, professionals view a steadily increasing consumption as a sign of a healthy economy because it signifies consumer confidence in spending versus uncertainty in the future and lack of spending.
2. Gross Investment (I):
Through this, the total expenditure made by all the institutions of the country within the limits of the country is calculated. Investment is important because higher levels of it increase productive capacity and boost employment rates. The difference between consumption and investment is the period over which the purchased good or service provides benefits to its purchaser.
3. Government (G):
Government represents the money (consumption expenditure and gross investment) spent by the government on goods and services, such as education, transportation, military, or infrastructure. This spending is funded by taxes and companies or borrowed. To run at a surplus instead of a deficit, the government needs to collect more money than it spends.
4. Exports – Imports (X-M):
The exports – imports piece of the equation refers to the exports of goods and services produced within the domestic economy and sold abroad, minus the imports purchased by domestic consumers. This includes all expenditures by companies geographically located within the country.
If the country’s export (X) is greater than the value of its imports (M), the net value is positive, and the country has a trade surplus. Likewise, if M is greater than X, the country is running a trade deficit.
GDP is directly related to the economic development and condition of the country. Therefore, the effect of GDP also falls on the common people. If the GDP figures are not good, then it will show the economic crisis of the country. And with this, if the GDP is less, then the average income of the people also decreases. This brings people below the poverty line.