LEARNING OBJECTIVES
By the end of this lesson, you should be able to:
Gross domestic product is a monetary measure of the market value of all the final goods and services produced in a specific time period in a country or state. Though GDP is typically calculated on an annual basis, it is sometimes calculated on a quarterly basis. In the U.S. for example, the government releases an annualized GDP estimate for each fiscal quarter and also for the calendar year. In the U.S., the Bureau of Economic Analysis (BEA) calculates the GDP using data ascertained through surveys of retailers, manufacturers, and builders, and by looking at trade flows.
The calculation of a country’s GDP encompasses all private and public consumption, investments, additions to private inventories, paid-in construction costs, and the foreign balance of trade. Of all the components that make up a country’s GDP, the foreign balance of trade is especially important. The GDP of a country tends to increase when the total value of goods and services that domestic producers sell to foreign countries exceeds the total value of foreign goods and services that domestic customers buy, when this happens a country is said to have a trade surplus. If the vise-versa occurs, if the amount that domestic consumers spend on foreign products is much greater than the total sum of what domestic producers sell to the foreign consumers, it is called a trade deficit. In this case, the GDP of a country tends to decrease.
GDP can be computed on either a nominal basis or real basis, the latter accounting for inflation. Overall, real GDP is a better method for expressing long term national economic performance since it uses constant dollars.
TYPES OF GROSS DOMESTIC PRODUCT
GDP can be reported in several ways. They are:
Nominal GDP
Nominal GDP is an assessment of economic production in an economy that includes current prices in its calculation. It doesn’t strip out inflation, or the pace of rising prices, which can inflate the growth figure. All goods and services counted in nominal GDP are valued at the prices that are actually sold for, in that specific year. Nominal GDP is used when comparing different quarters of output within the same year. When comparing the GDP of two or more years, real GDP is used because, in effect, the removal of the influence of inflation allows the comparison of the different years to focus solely on volume.
Real GDP
Real GDP is an inflation-adjusted measure that reflects the quantity of goods and services produced by an economy in a given year, prices held constant from year to year in order to separate out the impact of inflation or deflation from the trend in output over time. GDP is subject to inflation since it is based on the monetary value of goods and services. Economists use a process that adjusts for inflation to arrive at an economy’s real GDP. Real GDP is calculated using a GDP price deflator, which is the difference between the current year and the base year. Nominal GDP is divided by this deflator, yielding real GDP. Nominal GDP is usually higher than real GDP because inflation is typically a positive number. Real GDP accounts for changes in market value, therefore, narrows the difference between output figures from year to year.
GDP per Capita
GDP per Capita is a measurement of the GDP per person in a country’s population. GDP per capita can be stated in nominal, real, or PPP terms (Purchasing power parity)- a common metric applied by economic analysts to compare the currencies of different countries. It indicates the amount of output or income per person in an economy can indicate average productivity or average living standards. It shows how much economic production value can be attributed to each individual citizen. Per capita GDP is often analyzed alongside more traditional measures of GDP.
GDP Growth
The GDP growth rate compares the year-over-year change in a country’s economic output in order to measure how fast an economy is growing. It is usually expressed as a percentage rate, this measure is popular for economic policy makers because GDP growth is closely related to key policy targets such as unemployment rates and inflation.
METHODS OF CALCULATING GDP
GDP can be determined via three primary methods which are:
It is also known as the spending approach, it calculates spending by the different groups that participate in the economy. This approach can be calculated using the following formula:
GDP= C + G + I + NX
Where;
C= consumption
G= government spending
I= investment
NX=net exports
Consumption refers to private consumption expenditure or consumer spending. Consumers spend money to acquire goods and services. Consumers spending is the biggest component of GDP.
Government spending represents government consumption expenditure and gross investment. The government spends money on equipment, payroll, and infrastructure.
Investments refer to private domestic investment or capital expenditures. Businesses spend money in order to invest in their business activities. Business investment is a very critical component of GDP since it increases the productive capacity of an economy and boosts levels of employment.
Net export is total exports minus total imports (NX= Exports- Imports)
The production (output) approach
It is usually the reverse of the expenditure approach. Instead of measuring the input costs that contribute to economic activity, the production approach estimates the total value of economic output and less the cost of intermediate goods that are consumed in the process.
The income approach
The income approach calculates the income earned by all the factors of production in an economy, including the rent paid by land, the return on capital in form of interests.
SUMMARY
