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Gross Domestic Product Definition

19.03.2011 07:45:29

What is Gross Domestic Product

Our economy is greatly influenced by the GDP . Now, let’s define gross domestic product (GDP) in a clear way.

The gross domestic product is the total money value of all the products (goods or services) manufactured or provided during a certain period of time. It is one of the key indicators that represent the size of domestic economy.

As a rule, GDP represents the percentage based on the data comparison of previous months or year. Let’s see how this works: when they say that this year’s gross domestic product is 5%, this means that the production as well as the economy has enhanced by 5% if compared with the previous year.

It is not a simple task to measure GDP, although it can be calculated in a couple of different ways. For example, 1) add the amount earned per year (this is the income approach); or 2) add the amount spent per year (the expenditure approach). Both these methods should show about the same value.

Income Approach to GDP Calculation

The income approach, also known as GDP(I), implies the calculation of total values received by employees, businesses, investors, etc. with a couple of adjustments, which are as follows:
  • Taxes less subventions that determine the market price of goods and services
  • Devaluation is also taken into account. This helps to define the value of the gross domestic product

Expenditure Approach to GDP Measurement

Because most products are produced for consumption and sale, the expenditure approach to gross domestic product calculation is a good way to measure production.

As with any aspect of our economy, growth and production measured by GDP plays an important role in the economic life in general. For example, if the economy is well-developed and has a good percentage of GDP, this will impact the rate of employment and salaries as well as increase the demand for new labor that should meet the growing needs of the economy.

As a rule, if the gross domestic product goes up or down, this makes a great impact on the stock market . There are a few things to understand here: if an economy is poor, this means that companies get less profits and this, in turn, lowers stock costs . When GDP growth turns to be negative, this indicates that an economy is in its recession, so certain measures need to be taken to prevent the process.

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