GDP : Gross Domestic Product

Gross Domestic product is an economic indicator for the market value of all the finished goods and services produced in a specific time period, often annually in a domestic market

GDP as the name indicates is the final value of goods and services produced within a given country’s border

Say for example Apple is a US based firm but it has its manufacturing plants in China. So, all the mobiles manufactured in China adds to the G.D.P of China but not the U.S even firm is based in the United States

GDP is an important measure because it helps to understand if an Economy of a country is in the trend of growth or degrading

How GDP effects an Individual

When a country has strong GDP which means there are more goods being produced in the Nation which also means there would be in need of more workers for producing the goods. Also the firms would be paying more to the workers but skilled and unskilled labor either directly or in directly. As the pay scale raises for the workers people would be able to afford good amount of money in consuming more money on goods and services

Also one more key factor here is that when the G.D.P of a country is in growth phase more firms would be interested to invest in the country and it would further result in the economic growth in the future of the economy as well, but the hard factor is there are so many external factors that might influence the investments in any economy. Factors like Prices of Crude oil, The economies relations with other nations and the internal policies for the nation too

Types of GDP:

Nominal GDP : This is used to measure the GDP of a economy at the current market. This does not include any factors like Inflation or so

Real GDP : It is the nominal GDP would have been if there were no price changes from the base year.

For example In India, the Base Year of the GDP series was revised from 2004-05 to 2011-12 and released on 30 January, 2015

Why is this change done?

This has something to deal with Nominal and Real GDP.

Nominal GDP is calculated using the following equation:

GDP=C+I+G+(X-M)

Where:

C – Private consumption

I – Gross investment

G – Government investment

X – Exports

M – Imports

For example, if India reports $10 trillion in private consumption, $1 trillion in gross investment, $2 trillion in government investment, exported $2 trillion of goods and imported $1 trillion, its nominal GDP would be $14 trillion.

How is Real GDP Calculated?

To calculate real GDP, we must understand the concept of GDP deflator. The GDP deflator is a measure to compare market prices of a current year to that of a previous year.

Calculating GDP deflator

  1. Find the nominal GDP of a country(This is the GDP of a country at current Market prices)
  2. Selecting the base year to use for comparing the current Gross domestic product
  3. Calculate the Real GDP factor, this is just the multiplication of current GDP with the prices of the base year
  4. Now Divide the nominal GDP with the real GDP
  5. Multiply the above factor by 100

Step 1> For example UK economy has 2.65 Trillion GDP in 2008 Step 2> The base year lets assume is 1995 where we have a GDP 1.4 trillion

Step 3> Real GDP factor is 2.65*Prices in 1995(Say 0.2 times less than the Current year) . So the Real GDP factor here is 2.65*0.8=1.537trillion

Step 4> Now 2.65/1..537(In trillions)

Step 5> Now (2.65/1..537)*100=172.4

To calcualate the Real GDP use the below formula where GDP Deflator of Base year is always 100

Real GDP = Nominal GDP *(GDP Deflator of Base year/GDP Deflator of Current Fiscal year)

So now in the case of India as the GDP base year changes, the calculation changes resulting in higher growth of GDP when we take GDP base year starting 2011-12 instead of 2008-09

In the next chapter, I shall write on the different methods for calculating GDP

References:

https://www.thebalance.com/what-is-real-gdp-how-to-calculate-it-vs-nominal-3306040

https://bizfluent.com/info-8176524-types-gdp.html

https://en.wikipedia.org/wiki/Gross_domestic_product#Nominal_GDP_and_adjustments_to_GDP

https://www.investopedia.com/ask/answers/030415/what-functional-difference-between-gdp-and-gnp.asp