Gross domestic product (GDP)

Gross domestic product (GDP) is an economic indicator that reflects the monetary value of all final goods and services produced by a country in a given period of time, usually one year. It is used to measure the wealth of a country. It is also known as the gross domestic product (GDP).

The GDP measures the total production of goods and services of a country, so its calculation is quite complex. We have to know all the final goods and services that the country has produced and add them. That is, the production of apples, milk, books, boats, machines and all the goods that have been produced in the country to the services of a taxi, a dentist, a lawyer or a professor, among others. There are some data that are not included simply because they can not be counted or known. For example, self-consumption goods or the so-called submerged economy for example.

It is said that a country grows economically when the rate of change of GDP increases, that is, the GDP of the year calculated is greater than the previous year. The formula used to see the variation percentage is:

Variation rate GDP = [(GDP year 1 / GDP year 0) – 1] x 100 =%

How is the gross domestic product (GDP) calculated?

The GDP can be measured through three methodologies:

Spending method

It is the sum of residents’ expenditure on final goods and services over a period of time. Then the GDP = final consumption + gross capital formation + exports – imports. The most used way to calculate the GDP of a country is according to its aggregate demand:

GDP = C + I + G + X – M

Where C is consumption, I is investment, G is government spending, X is the exports and M is the imports. From this formula, we are shredding each data until we obtain all.

In this formula we can see, when the domestic consumption of a country decreases, the GDP decreases. That is, as long as the rest is stable. The same happens when investment, public spending or exports decrease.

Value-added method

It is the sum of the added value (gross) that is generated in the production of goods and services in a country in a certain period of time. In this case, the gross domestic product formula is:

GDP = GVA + subsidies – (direct, sales)

Where GVA refers to a gross added value.

For example, if a pastry shop sells bread, the added value of a bar will be its price minus what it cost to make the bar (flour, electricity, etc).

Income method

It is equivalent to the sum of the income earned by the owners of the productive factors (labour and capital) over a period of time. In this case the GDP = remuneration of employees + taxes – subsidies + operating surplus. In this way, the gross domestic product formula is:

GDP = Compensation of employees + Rent + Interest + Proprietor’s Income + Corporate Profits + Indirect business taxes + Depreciation + Net foreign factor income

Where RA is the compensation of employees and EBE is the gross operating surplus.

GDP growth

When we compare the gross domestic product of a quarter with the previous quarter, we obtain the quarter-on-quarter variation rate, that is, the economic growth that the country is experiencing. If we compare the GDP of a quarter with the same quarter of the previous year, we obtain the interannual rate. In this map you can see the concentration of GDP according to countries :

Criticism of gross domestic product (GDP)

One of the problems for which the GDP is criticized is because it does not measure the distribution of wealth within a country or the difference between countries. But for that, there are other indicators such as:

  • Gini index
  • Human Development Index
  • GDP per capita

As the size of a country’s production depends on the number of inhabitants it has, it is also used to compare the wealth between countries GDP per capita. That is the total GDP of a country among the inhabitants of that country. It is a measure to know how much is produced per person.

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