27 January 2017

Gross Domestic Product (GDP) - Basic Concept

What is GDP?
Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time. GDP is the basic measure of the country’s economic performance over a given period.

GDP is measured by three basic approaches
  1. Expenditure approach
  2. Income approach
  3. Value based approach
Types of GDP:
  • Real GDP
  • Nominal GDP
Real GDP is the production of goods and services valued at constant prices whereas nominal GDP is the production of goods and services valued at current prices.

But why we need to measure both real and nominal GDP?
Now when the total spending increases in a given period it points towards two happenings, either the goods or services are sold at higher prices (i.e inflation has increased) or the total output of goods and services have increased. While studying economy, economist tries to separate these two effects. Hence they measure the real GDP which allows them to find whether production of goods and services has increased or decreased over the periods.

Components of GDP:
GDP is a variable which depends upon four other variables. These variables form components of GDP
C= total consumption
I = gross investment
G= Government spending
NX= exports less imports

Consumption is spending by households on goods and services. Here we do not include purchase of new housing. Investment is spending on inventories. Equipments and purchase of new housing Government spending includes spending on goods and services by state and central government Net exports spending on the domestic products by foreigners less spending on foreign products by locals.