Gross Domestic Product
(GDP)
Economic growth is measured in terms of an increase in the size of a nation's economy. A broad measure of an economy's size is its output. The most widely-used measure of economic output is the Gross Domestic Product (abbreviated GDP).
GDP generally is defined as the market value of the goods and services produced by a country. One way to calculate a nation's GDP is to sum all expenditures in the country.
Production approach
" Market value of all final goods and services calculated during 1 year . "
The production approach is also called as Net Product or Value added method. This method consists of three stages:
1. Estimating the Gross Value of domestic Output in various economic activities;
2. Determining the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services; and finally
3. Deducting intermediate consumption from Gross Value to obtain the Net Value of Domestic Output.
Symbolically,
Gross Value Added = Value of output – Value of Intermediate Consumption.
Value of Output = Value of the total sales of goods and services + Value of changes in the inventories.
The sum of Gross Value Added in various economic activities is known as GDP at factor cost.
GDP at factor cost plus indirect taxes less subsidies on products is GDP at Producer Price.
Income approach " sum total of incomes of individual living in a country during 1 year ."
This method measures GDP by adding incomes that firms pay households for factors of production they hire- wages for labour, interest for capital, rent for land and profits for entrepreneurship.
The US "National Income and Expenditure Accounts" divide incomes into five categories:
1. Wages, salaries, and supplementary labour income
2. Corporate profits
3. Interest and miscellaneous investment income
4. Farmers’ income
5. Income from non-farm unincorporated businesses
These five income components sum to net domestic income at factor cost.
Expenditure approach According to expenditure approach, GDP is the sum of consumption, investment, government expenditure, net foreign exports of a country during a year.
Algebraic expression under expenditure approach is,
GDP=C+I+G+(X-M)
Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M)=Export minus import
Nominal GDP and Real GDP
Without any adjustment, the GDP calculation is distorted by inflation. This unadjusted GDP is known as the nominal GDP. In practice, GDP is adjusted by dividing the nominal GDP by a price deflator to arrive at the real GDP.
In an inflationary environment, the nominal GDP is greater than the real GDP. If the price deflator is not known, an implicit price deflator can be calculated by dividing the nominal GDP by the real GDP:
Implicit Price Deflator = Nominal GDP / Real GDP
The composition of this deflator is different from that of the consumer price index in that the GDP deflator includes government goods, investment goods, and exports rather than the traditional consumer-oriented basket of goods.
GDP usually is reported each quarter on a seasonally adjusted annualized basis.
GDP Growth
Countries seek to increase their GDP in order to increase their standard of living. Note that growth in GDP does not result in increased purchasing power if the growth is due to inflation or population increase. For purchasing power, it is the real, per capita GDP that is important.
While investment is an important factor in a nation's GDP growth, even more important is greater respect for laws and contracts.
Gross national product Gross National Product (GNP) is the market value of all products and services produced in one year by labour and property supplied by the residents of a country. Unlike Gross Domestic Product (GDP), which defines production based on the geographical location of production, GNP allocates production based on ownership.
GNP does not distinguish between qualitative improvements in the state of the technical arts (e.g., increasing computer processing speeds), and quantitative increases in goods (e.g., number of computers produced), and considers both to be forms of "economic growth".
we should remember the following aspects about GNP.
(i) GNP is a flow concept: GNP represents a flow. It is a quantity produced per unit of time. It is the value of final goods and services I produced in a country during a given time period.
(ii) GNP measures final output: While calculating GNP, the market value of only final goods and services produced in a year are added up. Final goods are those goods which are purchased for final use in I the market.
(iii) GNP is output produced by the citizens of a country: Gross national product is the final output of goods and services produced by the citizens and businesses of a country during a given time period which is usually a yea
Gross National Product is the total market value of all final goods and services produced annually in a country plus net factor income from abroad. Thus, GNP is the total measure of the flow of goods and services at market value resulting from current production during a year in a country including net factor income from abroad. The GNP can be expressed as the following equation:
GNP=GDP+NFIA (Net Factor Income from Abroad)
or, GNP=C+I+G+(X-M)+NFIA
Hence, GNP includes the following:
(GDP)
Economic growth is measured in terms of an increase in the size of a nation's economy. A broad measure of an economy's size is its output. The most widely-used measure of economic output is the Gross Domestic Product (abbreviated GDP).
GDP generally is defined as the market value of the goods and services produced by a country. One way to calculate a nation's GDP is to sum all expenditures in the country.
Production approach
" Market value of all final goods and services calculated during 1 year . "
The production approach is also called as Net Product or Value added method. This method consists of three stages:
1. Estimating the Gross Value of domestic Output in various economic activities;
2. Determining the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services; and finally
3. Deducting intermediate consumption from Gross Value to obtain the Net Value of Domestic Output.
Symbolically,
Gross Value Added = Value of output – Value of Intermediate Consumption.
Value of Output = Value of the total sales of goods and services + Value of changes in the inventories.
The sum of Gross Value Added in various economic activities is known as GDP at factor cost.
GDP at factor cost plus indirect taxes less subsidies on products is GDP at Producer Price.
Income approach " sum total of incomes of individual living in a country during 1 year ."
This method measures GDP by adding incomes that firms pay households for factors of production they hire- wages for labour, interest for capital, rent for land and profits for entrepreneurship.
The US "National Income and Expenditure Accounts" divide incomes into five categories:
1. Wages, salaries, and supplementary labour income
2. Corporate profits
3. Interest and miscellaneous investment income
4. Farmers’ income
5. Income from non-farm unincorporated businesses
These five income components sum to net domestic income at factor cost.
Expenditure approach According to expenditure approach, GDP is the sum of consumption, investment, government expenditure, net foreign exports of a country during a year.
Algebraic expression under expenditure approach is,
GDP=C+I+G+(X-M)
Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M)=Export minus import
Nominal GDP and Real GDP
Without any adjustment, the GDP calculation is distorted by inflation. This unadjusted GDP is known as the nominal GDP. In practice, GDP is adjusted by dividing the nominal GDP by a price deflator to arrive at the real GDP.
In an inflationary environment, the nominal GDP is greater than the real GDP. If the price deflator is not known, an implicit price deflator can be calculated by dividing the nominal GDP by the real GDP:
Implicit Price Deflator = Nominal GDP / Real GDP
The composition of this deflator is different from that of the consumer price index in that the GDP deflator includes government goods, investment goods, and exports rather than the traditional consumer-oriented basket of goods.
GDP usually is reported each quarter on a seasonally adjusted annualized basis.
GDP Growth
Countries seek to increase their GDP in order to increase their standard of living. Note that growth in GDP does not result in increased purchasing power if the growth is due to inflation or population increase. For purchasing power, it is the real, per capita GDP that is important.
While investment is an important factor in a nation's GDP growth, even more important is greater respect for laws and contracts.
Gross national product Gross National Product (GNP) is the market value of all products and services produced in one year by labour and property supplied by the residents of a country. Unlike Gross Domestic Product (GDP), which defines production based on the geographical location of production, GNP allocates production based on ownership.
GNP does not distinguish between qualitative improvements in the state of the technical arts (e.g., increasing computer processing speeds), and quantitative increases in goods (e.g., number of computers produced), and considers both to be forms of "economic growth".
we should remember the following aspects about GNP.
(i) GNP is a flow concept: GNP represents a flow. It is a quantity produced per unit of time. It is the value of final goods and services I produced in a country during a given time period.
(ii) GNP measures final output: While calculating GNP, the market value of only final goods and services produced in a year are added up. Final goods are those goods which are purchased for final use in I the market.
(iii) GNP is output produced by the citizens of a country: Gross national product is the final output of goods and services produced by the citizens and businesses of a country during a given time period which is usually a yea
Gross National Product is the total market value of all final goods and services produced annually in a country plus net factor income from abroad. Thus, GNP is the total measure of the flow of goods and services at market value resulting from current production during a year in a country including net factor income from abroad. The GNP can be expressed as the following equation:
GNP=GDP+NFIA (Net Factor Income from Abroad)
or, GNP=C+I+G+(X-M)+NFIA
Hence, GNP includes the following:
- Consumer goods and services.
- Gross private domestic investment in capital goods.
- Government expenditure.
- Net exports (exports-imports).
- Net factor income from abroad.