The Gross Domestic Product (GDP) of a country is the total value of all final goods and services produced within a country over a period of time. GDP estimates are used to determine the economic performance of a whole country, and to make international comparisons Businesses can also use GDP as a guide to decide how best to expand or contract their production and other business activities. And investors also watch GDP since it provides a framework for investment decision-making. Ex: The United States had a GDP of 16.8 trillion USD in 2013.
GDP is not a complete measure of economic activity. Since it only represents the final output or value added at each stage of production, it fails to account for the total output or total sales along the entire production process. One of the biggest drawbacks of using GDP is that it tells us little about our overall or individual economic welfare.
Calculating the Gross Domestic Product (GDP)
The following equation is used to calculate the Gross Domestic Product:
GDP = C + I + G + (X-M)
This can also be expressed as GDP = private consumption + gross investment + government investment + government spending + (exports – imports).
GDP can be determined in three ways, all of which should give us the same result. They are the production (or output or value added) approach, the income approach, or the expenditure approach.
The most direct of the three is the production approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people’s total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors must be equal to the value of their product, and determines GDP by finding the sum of all producers’ incomes.
The GDP is usually represented in four ways:
Real Gross Domestic Product – This is the GDP after inflation has been accounted for.
Nominal Gross Domestic Product – This is the GDP at current prices (i.e. with inflation)