Gross Domestic Product

To measure the economic performance of an economy,the first measure is the Gross Domestic Product or GDP in short. It is an important economic statistic/data because it provides the best estimate of the market value of all final goods and services produced by an economy in one year. It is usually used to measure and compare economic outputs of various countries around the world. It allows us to compare the total output level of one country to the total output level of another country with ease.

GDP is measured in monetary value or cash value of all final goods and services produced in a year . GDP measures two things at once- the total income of everyone in the economy and the total expenditure on economy’s output of goods and services. A higher GDP means more output from an economy and typically a stronger economy. 

For an economy as whole,income must equal expenditure. This is true,because every transaction has two parties: a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller.

Thus we can calculate GDP for any economy in one of the two ways- by adding up the total expenditure by households or by adding up the total incomes (such as wages,rent,profit,interest ,dividends) paid by firms. Because all expenditure in the economy ends up as someone’s income,GDP is the same regardless of how we calculate it. Expenditure method has four components and we can formulate an equation as Y=C+I+G+NX.

Y-denotes GDP is divided into four components, namely

C-represents for consumption. Includes purchases by households on goods and services (tangible or intangible).

I-represents investment. The purchase of goods that will be be used in the future to make other goods (capital).

G-represents government spending on goods and services by local,state and federal government.

NX-represents net export of an economy. The number of exports minus the number of imports in the economy. It is also called trade balance.

While GDP includes most transactions in an economy ,it does not include every transaction . Thus, GDP is a good measure but not a perfect measure for an economy’s well being. Some of the goods not included in GDP are-

  • Transaction of illegal goods and services
  • Sale of second hand or used goods
  • Things produced and consumed at home or non market transactions
  • Transfer of payments-payments such as social security by the government,and many more.

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