Gross domestic product (GDP)

Gross domestic product (GDP)
Source: Tavaga

The gross domestic product or GDP measures the market value of all final goods and services produced within an economy in a given period of time (according to the output definition), or equivalently, the aggregate income earned by all households, all companies, and the government within the economy in a given period of time (known as the income definition). There are both residents as well as foreign producers within the domestic territory of the country. GDP includes the market value of the product by all such producers.

Difference between Real GDP and Nominal GDP

There are two kinds of GDP numbers prevalent — nominal GDP and real GDP. The nominal GDP measures the value of all goods and services produced at current prices and does not take inflation (which leads to an erosion of the value of money) into account Whereas Real GDP measures the value of all goods and services produced against that of an agreed-upon base year’s prices.

What is not included in GDP?

  1. Income from illegal activities, like gambling
  2. Black money or the income not reflected in the account books of the producers
  3. Transfer payments, like scholarships or old age pensions
  4. Income from monetary transactions, like from shares and debentures
  5. Value of second-hand good

Gross National Product at Market Price

It is calculated on a per capita basis, which means dividing the total GDP by the total population.

Therefore, the GDP per capita depends on the total amount of the population. This is the reason why the richest economies don’t have the highest GDP. For ex: – China and the USA have one of the highest GDP, but they don’t rank in terms of GDP per capita due to their high population. India’sIndia’s GDP was $10.5 trillion, but its GDP per capita was $7,763 due to 1.35 billion people. Japan has the fifth largest GDP in the world, totaling $5.4 trillion, but since it has 126.5 million people, its GDP per capita was $42,798.

How to calculate GDP?

GDP = C + I + G +(X-M)

Where C is Private Consumption

            I is Investments

           G is Government Spending & Government Investments

           X is Exports

           M is Imports

Usually, the economic health of a country is assessed by GDP and its Growth Rate.