Full form of GDP is a gross domestic product. Gross Domestic Product is the market value or total monetary of all finished goods and services which are produced in the specific time period within the country’s borders. It acts as a comprehensive scoreboard of economic health in a country or it is a broad measure of production within a country. The most commonly used tool to measure the economic activity of any country is GDP.
The “Gross” means total, “Domestic” means within the boundary, and “Product” means goods and services. Only the final good and services which are sold for the money included in GDP. As any good which is used to make a final good is already added in the final value that’s why the sale of only final goods is counted. For example to build a chair you purchase wood and in the final price of the chair producer add the cost of the wood.
GDP At the end of the 18 th century, the concept of GDP was initiated. American economist Simon Kuznets developed the modern concept in 1934 and in 1944 at Bretton Woods conference it was adopted as the main measure of the country’s economy.
Things not included in GDP
There are various things which are not supposed to be included in GDP like unpaid work which is performed within the family, volunteer work etc, goods and services exchanged through the barter the system, non-monetary compensated work, illegal activities, black market, transfer payments, goods which are not produced for sale
at market price, second-hand goods, intermediate goods or goods which are used for final goods and services.
GDP is divided into two categories which are Nominal GDP and Real GDP.
Nominal GDP measures the value of national output at current prices with no adjustments for the effects of the inflation.
Real GDP is adjusted for inflation and this measures the volume of output at constant prices. The economists are referring to real GDP for discussing economic growth.
Calculation of GDP
GDP can be calculated through three ways by using expenditure, production or income approach all methods result will be the same.
The formula of GDP with expenditure approach
C stands for private consumption, I for gross private investment, G for government investment; X is for exports and M for imports.
GDP shows what the growth rate is and what the size of the economy of any country is. It is an important factor for all the investors, policymakers and business houses while ending up on any financial decision. This helps them to make perfect, calculated and planned decisions.