A Business Encyclopedia

Gross Domestic Product (GDP)

Definition: The term GDP stands for Gross Domestic Product, is a measure of market value of all finished goods and services which are newly produced, during a particular period and that too within the domestic territory of the country.

The term domestic territory signifies a different meaning, concerning national income accounting, it includes:

  • The area lying within the political borders, including the territorial waters of the nation.
  • Ships and aircraft, run by the countrymen, between two or more than two countries.
  • Floating platforms, fishing vessels, oil and natural gas rigs operated by the nationals, in the international waters or involved in the process of extraction, in the region, where the country has exclusive rights.
  • Military establishments, embassies and consulates of the country, located outside.

GDP is considered as the best measure, so far, that is used to roughly estimate the size and growth of the economy. It also reflects the economic soundness of the country and standard of living of its residents. In short, it tells us, how the economy is doing, i.e. good or bad.

Calculation of GDP

Gross Domestic Product (GDP) can be calculated easily with the help of the following formula:
GDP = C + G + I + NX
where C denotes consumer spending, it encompasses all private and public consumption
G represents government outlays
I indicate total investment made by country
NX refers to the net of exports, i.e. total exports minus total imports.

In the calculation of Gross Domestic Product, income earned locally by the foreigners are added to the total economic value of all goods and services produced within the country’s geographical boundaries, while income earned outside the country by the residents are deducted from it.

Estimation of GDP

  1. GDP at current price or Nominal GDP: If the estimation of gross domestic product is made at the prevailing prices, i.e. the total value goods and service is calculated at current market prices, it is known as Nominal GDP or GDP at current prices.
  2. GDP at constant price or Real GDP: When the measurement of GDP is based on some fixed prices, in essence, the prices which are prevalent at a point of time. It is an inflation-adjusted measure, representing the monetary value of goods and services, an economy produces in a year, expressed in base-year prices.
  3. GDP at factor cost: If the calculation of GDP rests on the sum of net value added by various producing units and the consumption of fixed capital, it is known as GDP at factor cost. Here net value added means the overall contribution of all producing units towards the current flow of products and services.
  4. GDP at market price: When the GDP is computed at market prices, it takes into account the indirect taxes and eliminates subsidies granted by the government.

The method used for computing Gross Domestic Product is similar in all the countries, and so, a comparison can be made among countries, to gauge the performance of different countries. In addition to this, after adjusting inflation, GDP of current year can be compared with that of the previous year, to know the overall economic growth or decline of the country and also ascertain whether the economy is going through the recession.

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