GDPAcronym Stand forGDP Gross Domestic ProductCurrent GDP(India) -: 4 trillion dollarsGDP Growth rate of India is 7.7%
IntroductionMicroeconomics is the study of how individualhouseholds and firms make decisions and how theyinteract with one another in markets.Macroeconomics is the study of the economy as a whole.Its goal is to explain the economic changes that affectmany households, firms, and markets at once.
Definitions‘ For GDPGDP is equal to the total expenditures for all final goodsand services produced within the country in a year.GDP is equal to the sum of the value added at everystage of production (the intermediate stages) by all theindustries within a country, plus taxes less subsidies onproducts, in the period.
Definitions‘ For GDPGDP is equal to the sum of the income generated byproduction in the country in the period—that is,compensation of employees, taxes on production andimports less subsidies, and gross operating surplus (orprofits).
Some Important Points“Gross" means that depreciation of capital stock is notsubtracted out of GDP. If net investment (which isgross investment minus depreciation) is substituted forgross investment in the equation above, then theformula for NET DOMESTIC PRODUCT is obtained.Consumption and investment in this equation areexpenditure on final goods and services.
Some Important PointsIt doesn’t Matter whether production is done bydomestic companies or foreign companies butproduction has to be done within countries territoryonly.
Calculating GDPCommonly the Expenditure Method is used for measuring andquantifying GDPFormula: GDP = C + I + G+(X-M) OR GDP = consumption + gross investment + government spending + (exports – imports)
Diagrammatic Representation Consumption Gross Investment Government GDP Spending (Export - Import)
Components of GDPGDP = C + I + G + (X-M)WHERE:C = ConsumptionI = InvestmentG = Government ExpenseX = ExportI = Import
Components of GDPC : consumption Includes :: Personal expenditures mainlyconsists of food, households, medical expenses, rent, etc. Forexample, if you live in rental home then renovation spendingwould be measured as Consumption.
Components of GDPI : investments by business or households in capital.Example, If you spend money to renovate your hotel so thatoccupancy rates increase, that is private investment. Includes:Construction of a new mine, Purchase of machinery orequipment for factory, Purchase of software, Expenditure onnew houses, Buying goods and services.NOTE:: Investments on financial products like insurance,mutual fund is not included in Investments.
Components of GDPTotal government expenditures on final goods andservices Includes :: Investment expenditure by thegovernment. Purchase of weapons for the military, Salaries ofpublic servants. Example: if a government agency isconverting the hotel into an office for civil servants therenovation spending would be measured as part of publicsector spending (G).
Components of GDPX:Gross Exports Includes :: All goods and servicesproduced for overseas consumption. Example, If a domesticproducer is paid to make the software for a foreign hotel, thepayment would be counted in gross export.M:Gross imports Includes :: Any goods or servicesimported for consumption Example, If the renovation of hotelinvolves the purchase of a electronics from abroad, that spendingwould be counted in gross imports.
MeasurementGDP is measured by national statistical agency. In India-Ministry of statistics and programmed implementation. In Russia-federal service of state statistics In US- bureau of economic analysis.
Comparing GDP Across TimeGDP can grow due to: 1) Economy producing more 2) Prices having risen
Calculating GDP and Real GDP ina Simple Economy
Nominal GDPNominal GDP, is the value of all final outputproduced in an economy during a given year,calculated using the prices current in the yearwhich the output is produced.
Keeping it RealComparing output over time is best donewith real output which is nominal outputadjusted for inflation.Real GDP is the value of the final goods andservices produced calculated using the pricesof some base year.
Nominal Vs. RealNominal GDP is GDP calculated at existingprices.Real GDP is nominal GDP adjusted forinflation.Real GDP is important to society because itmeasures what is really produced.
Real vs. Nominal GDP
Shortcomings of GDP as a Measure of National Economic Well-beingProduction that is excluded Household production Illegal production The underground economy Treatment of leisure time Human cost and benefitsGDP gives us a ballpark idea of how much we produce, notnecessarily how well off we are.
Why GDP is Important?The gross domestic product (GDP) is one the primaryindicators used to gauge the health of a countrys economy.It represents the total dollar value of all goods and servicesproduced over a specific time period - you can think of itas the size of the economy. Usually, GDP is expressed as acomparison to the previous quarter or year. For example, ifthe year-to-year GDP is up 3%, this is thought to meanthat the economy has grown by 3% over the last year.
Why GDP is Important?As one can imagine, economic production and growth,what GDP represents, has a large impact on nearlyeveryone within that economy. For example, when theeconomy is healthy, you will typically see lowunemployment and wage increases as businesses demandlabor to meet the growing economy.