GDP is the goods and services that are counted and produced within a country's borders. For more details about GDP, you can read the following article. Also, follow GIC's social media for economic information, especially trading and investment!

Definition of GDP Is

GDP stands for "Gross Domestic Product," which is the total value of goods and services produced within a country during an accounting period. In simpler terms, it reflects the total domestic and foreign production within a country's trade balance. GDP also takes into account factors such as supply and demand, inflation, and per capita income in its calculation.

English economist William Petty (1654-1676) was the first to suggest the concept, further refined by English politician Charles Davenant (1695) and modified by American economist Simon Kuznets (1934). Two common ways to calculate gross domestic product are nominal (not adjusted for inflation) and real (adjusted for inflation/deflation). Since factoring the former by inflation gives the latter, it is relatively higher than the latter.

In other words, an economy is in a good state or trade surplus if the market value of its goods and services, including net exports, is greater than its imports. Conversely, if the total value of domestic production of goods and services is less than imports, the economy is in a state of trade failure and must be regulated. Significantly, the higher the difference between nominal and real gross domestic product, the greater the risk of inflation or deflation.

Gross domestic product is an important aspect in determining gross national income. It helps economists, businesses, and governments determine the current and future state of the economy. Furthermore, it describes a country's economy, production, employment, and per capita income. Not all productive activities are included in GDP. For example, unpaid work (such as that done at home or by volunteers) and black market activities are not included because they are difficult to measure and value accurately.

This means, for example, that a baker who produces a loaf of bread for a customer will contribute to GDP, but will not contribute to GDP if he bakes the same bread for his family (although the ingredients he buys will count). Furthermore, "gross" domestic product does not take into account the "wear and tear" of the machinery, buildings, and so on (called the capital stock) used in producing output. If this depletion of the capital stock, called depreciation, is subtracted from GDP we are left with net domestic product.

Types of GDP Are

Gross domestic product has four categories, each revealing unique features of an economy and its gross national income:

#1 – Nominal GDP

Nominal GDP will evaluate a country’s overall economic output without taking inflation into account. Instead, it assesses all goods and services produced domestically based on current market prices. In addition, it is an excellent tool for comparing economic output from different quarters of the same year.

#2 – GDP Riil

Real GDP is the most accurate indicator of a country's economic activity, such as growth or decline and production of goods and services in a given year. The calculation of actual gross domestic product uses the GDP Deflator, which measures the difference in the value of all products and services between the current year and a base year. This helps compare gross domestic products across years by adjusting changes in market prices for inflation or deflation.

#3 – GDP Potential

Potential GDP is a benchmark set for the economic output a country can achieve under perfect conditions when everything is under control. Examples include low inflation, stable or increasing purchasing power of the currency, full employment, optimal utilization of resources, and so on.

#4 – GDP Per Capita

GDP Per Capita is a measure of a country's total economic output by dividing its nominal gross domestic product for a given period by its total population. The result shows the average per capita income, standard of living, and worker productivity.

#5 – GDP Growth Rate

It measures the changes in a country's overall economic output on a quarterly or annual basis to help address issues such as unemployment and inflation. A negative real gross domestic product growth rate indicates economic contraction, recession, or depression, while an overly positive growth rate suggests inflation.

#6 – Purchasing Power Parity (PPP)

It determines a country's gross domestic product based on Purchasing Power Parity (PPP) of economic production across various countries, market prices of goods and services, income, cost of living, and standard of living.


How to Calculate GDP Is

Following are the three most common methods for calculating gross domestic product that give comparable results:

Production Approach (Output or Value Added)

Subtracting total sales from the value of intermediate inputs used in the manufacturing process, that is, the total “value added” at each step of production.

Income Approach

Adding up the income earned from production factors.

Expenditure Approach (Speculated or Spending)

Summing up the amount spent by end users on goods and services. By adding up all the money spent by citizens on goods and services over a year. It also considers spending by other economic actors, including businesses and the government. It uses the following formula for calculation: GDP = C + I + G + NX Where,
  • C = Private and public consumption expenditures by households and non-profit organizations on goods and services/home purchases.
  • I = Domestic private investment/capital expenditure by businesses in construction, production, and storage of goods and services.
  • G = Government consumption expenditure/gross spending/investment on goods and services.
  • NX = Net Exports/foreign trade balance (Exports – Imports).
The nominal value obtained from this GDP formula is then calibrated with the inflation rate to arrive at the actual figure.

Benefits of GDP

The benefits of economic growth include:
  1. Higher average income . Economic growth allows consumers to consume more goods and services and enjoy better living standards. Economic growth during the 20th century was a major factor in reducing absolute poverty and allowing for increases in life expectancy.
  2. Unemployment is lower. With higher output and positive economic growth, firms tend to hire more workers which creates more jobs.
  3. Lower government borrowing. Economic growth creates higher tax revenues, and less need to spend money on benefits such as unemployment benefits. Economic growth therefore helps reduce government borrowing. Economic growth also plays a role in lowering the debt-to-GDP ratio.
  4. Improving public services . Higher economic growth leads to higher tax revenues and this allows the government to spend more on public services, such as health care and education, etc. This can enable higher standards of living, such as increased life expectancy, higher literacy rates, and a greater understanding of civic and political issues.
  5. Money can be spent to protect the environment. With higher economic growth, society can devote more resources to promoting recycling and the use of renewable resources. The Kuznets curve suggests that economic growth initially worsens the environment, but after a certain point in growth, environmental damage will decrease. This theory is controversial. However, higher growth may be consistent with better environmental outcomes.
  6. Investment. Economic growth encourages firms to invest, to meet future demand. Higher investment increases the scope for future economic growth – creating a virtuous cycle of economic growth/investment.
  7. Increased research and development. High economic growth leads to increased profitability for companies, allowing more spending on research and development. This can lead to technological breakthroughs, such as improved medicines and greener technologies. Also, sustained economic growth increases confidence and encourages companies to take risks and innovate.
  8. Economic development . The biggest factor driving economic development is sustainable economic growth. Economic growth in Southeast Asia over the past few decades has played a major role in reducing poverty levels, increasing life expectancy and enabling more economic prosperity.
  9. More choices. In less developed countries, where the majority of the population works in subsistence agriculture/farming, economic growth allows for a more diversified economy with people able to work in the service sector, manufacturing, and have greater lifestyle choices.
  10. Reduction in absolute poverty . Economic growth has played an important role in reducing absolute poverty (people with insufficient income to meet basic needs)

After knowing GDP is an abbreviation of "Gross Domestic Product" along with other explanations such as types, how to calculate, and its benefits, you can learn other economic discussions only in the GIC Journal. Also, make sure you register to trade at GIC!