Gross Domestic product (GDP) is the monetary value of all the finished goods and services produced within countries borders in a specific time period. Though GDP is calculated on an annual basis, it can be calculated on a Quarterly basis as well. GDP is commonly used as an indicator of the economic health of the country, as well as a gauge of a countries standard of living.Gross Domestic product includes all private and public consumption, government outlays, investments and exports minus imports that occur within a defined territory.
Simply put, GDP is a broad measurement of a nation’s overall economic activity.
GDP = C+G+I+NX
C= All private consumption, or consumer spending, in a nation’s economy.
G = Sum of governments spending
I = sum of all the countries investment, including business capital expenditures
NX= The nation’s total net exports, calculated as total exports minus total imports.
Usually GDP is expressed as a comparison to the previous quarter or year. For example if the year-to-year GDP is 3%, it indicates that GDP has grown 3% over the last year.
Gross Domestic product can be estimated in three ways, (in theory, should yield identical figures). They are:
- Expenditure Basis : How much money was spent
- Output basis: How many Goods and services were sold.
- Income basis: How much income (profit) was earned.
These estimates are published quarterly and constantly revised to approach greater accuracy. The most closely watched data is the period to period change in output and consumption, in real (inflation adjusted terms).
If indirect taxes are deducted from the market prices and subsidies are added, it is called “GDP at factor cost or national dividend”. If depreciation of the national capital stock is deducted from the GDP, it is called net domestic product. If income from abroad is added, it is called gross national product (GNP). The main criticisms of GDP as a realistic guide to a nation’s well-being are that:
- It is preoccupied with indiscriminate production and consumption, and
- It includes the cost of damage caused by pollution as a positive factor in its calculations, while excluding the lost value of depleted natural resources and unpaid costs of environmental harm.
- GDP doesn’t take into account the underground or unofficial economy: everything from black-market activity to under-the-table employment, as well as other transactions that, for various reasons, are not reported to the government.