ABC of GDP

by pawanyadav on September 1, 2009

GDP is nation’s broadest quantitative measurement which is done regarding countries economic analysis. Soon after releasing the GDP growth data at 6.1 per cent many news channel has started discussion on this topic. Some of my friend asked me, What exactly the GDP mean? What role it plays in a country’s economy and how is it calculated? So….

What exactly the GDP mean?

Gross Domestic Product(GDP), sometimes known as Gross Domestic Income(GDI) is a basic measure of a country’s economic performance and is the market value of all final goods and services made within the borders of a nation in a year. GDP shows the total market value of all final goods and services produced in a country in a given year which is equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.

The GDP report also includes inflation data many times but sometime inflation is calculated separately. GDP report is released quarterly and compared to previous quarter of the same quarter in the previous fiscal year.

What role it plays in country’s economy?

The gross domestic product (GDP) is one the primary indicator which is used to monitor the health of a country’s economy. It represents the total value of all goods and services produced over a specific time period, one can think it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last fiscal year.

As one can imagine how economic production and growth which represents GDP can make impact on everyone bounded by that particular economy. A poor GDP data clearly shows the country’s unemployment, lower profit for companies which in turns means lower stock prices. One thing is clear either GDP ups or downs it directly affects the share market.

By this data economist calculate whether the economy is in recession. Investors are badly affected by negative GDP growth. So simply, GDP growth shows the economic growth or that country.

How it is calculated?

Measuring GDP could be tough task that’s why this is the job for the economist only.But a basic idea may be the calculation of the earning of everyone or the calculation of the total expenditure of everyone in a particular time period either quarterly or yearly.

The most common approach to measuring and quantifying GDP is the expenditure method:

GDP = private consumption(or consumer expenditure) + gross investment + government expenditure + (gross exports ?gross imports), or,
GDP = C + I + G + (X ? M).

If one has to compare GDP growth between 2007 vs 2008 then one can use:

$GDP_{growth}=left ( frac{GDP_{2008}}{GDP_{2007}} - 1 right ) 100%.$