Gross domestic product (0)

Gross Domestic Product (GDP)
The gross domestic product (GDP) or gross domestic income (GDI) is a measure of a country 's overall economic output.
It is the market value of all final goods and services made within the borders of a country in a year .
It is often positively correlated with the standard of living , alternative measures to GDP for that purpose.

• Gross domestic product comes under the heading of national accounts , which is a subject in macroeconomics.
  

Gross National Product
Gross national product (GNP), in economics , a quantitative measure of a nation 's total economic activity , generally assessed yearly or quarterly.
The GNP equals the gross domestic product plus income earned by domestic residents through foreign investments minus the income earned by foreign investors in the domestic market.
Gross Domestic Product
GDP can be determined in three ways , all of which should in principle give the same result .

• They are the product (or output) approach , the income approach, and the expenditure approach.
  

The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total.
The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying things.
The income approach works on the principle that the incomes of the productive factors (" producers ") must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes
"Gross" means that GDP measures production regardless of the various uses to which that production can be put.
Production can be used for immediate consumption , for investment in new fixed assets or inventories, or for replacing depreciated fixed assets.
"Domestic" means that GDP measures production that takes place within the country's borders.

• In the expenditure- method equation, the exports-minus-imports term is necessary in order to null out expenditures on things not produced in the country (imports) and add in things produced but not sold in the country (exports).
  

Economists ( since Keynes ) have preferred to split the general consumption term into two parts; private consumption, and public sector (or government ) spending.

• Two advantages of dividing total consumption this way in theoretical macroeconomics are:
  

Private consumption is a central concern of welfare economics.
The private investment and trade portions of the economy are ultimately directed (in mainstream economic models) to increases in long-term private consumption.
If separated from endogenous private consumption,

Government consumption can be treated as exogenous.
Different government spending levels can be considered within a meaningful macroeconomic framework .
Income Approach
This method measures GDP by adding incomes that firms pay households for the factors of production they hire- wages for labor , interest for capital, rent for land and profits for entrepreneurship.
The "National Income and Expenditure Accounts" divide incomes into five categories:

• Wages, salaries, and supplementary labour income
  
• Corporate profits
  
• Interest and miscellaneous investment income
  
• Farmers’ income
  
• Income from non- farm unincorporated businesses
  

These five income components sum to net domestic income at factor cost .
Two adjustments must be made to get GDP:

• Indirect taxes minus subsidies are added to get from factor cost to market prices.
  
• Depreciation (or capital consumption) is added to get from net domestic product to gross domestic product.
  

Components of GDP by Expenditure
GDP (Y) is a sum

• Consumption (C),
  
• Investment (I),
  
• Government Spending (G) and
  
• Net Exports (X - M).
  

Y = C + I + G + (X − M)
C (consumption) is normally the largest GDP component in the economy, consisting of private (household final consumption expenditure) in the economy.
These personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services.
Examples include food, rent, jewelry, gasoline and medical expenses but do not include the purchase of new housing .
I (investment) includes business investment in equipments for example and does not include exchanges of existing assets.
Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory .
Spending by households (not government) on new houses is also included in Investment.
In contrast to its colloquial meaning , 'Investment' in GDP does not mean purchases of financial products .
Buying financial products is classed as ‘ saving ', as opposed to investment.
G (government spending) is the sum of government expenditures on final goods and services.
Examples includes salaries of public servants, purchase of weapons for the military , and any investment expenditure by a government.
It does not include any transfer payments, such as social security or unemployment benefits.
X (exports) represents gross exports.
GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.
M (imports) represents gross imports.
Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic
Income Approach
Total factor income = Employee compensation + Corporate profits + Proprietor’s income + Rental income + Net interest
Another formula for GDP by the income method is:
GDP = R + I + P + SA + W
Where

• R: rents
  
• I: interests
  
• P: profits
  
• SA: statistical adjustments (corporate income taxes, dividends, undistributed corporate profits)
  
• W: wages
  

Gross Domestic Product
GDP can be contrasted with gross national product (GNP) or gross national income (GNI).
The difference is that GDP defines its scope according to location , while GNP defines its scope according to ownership.
In a global context , world GDP and world GNP are therefore equivalent terms.

• GDP is product produced within a country's borders;
  
• GNP is product produced by enterprises owned by a country's citizens.
  

International Standards
The international standard for measuring GDP is contained in the book System of National Accounts (1993), which was prepared by representatives of the International Monetary Fund, European Union, Organization for Economic Co-operation and Development , United Nations and World Bank .
Nominal GDP and Real GDP
The GDP calculation is distorted by inflation. This unadjusted GDP is known as the nominal GDP.
In practice , GDP is adjusted by dividing the nominal GDP by a price deflator to arrive at the real GDP.

• GDP usually is reported each quarter on a seasonally adjusted annualized basis
  

In an inflationary environment, the nominal GDP is greater than the real GDP.
If the price deflator is not known, an implicit price deflator can be calculated by dividing the nominal GDP by the real GDP:

• Implicit Price Deflator   =   Nominal GDP   /   Real GDP
  

The composition of this deflator is different from that of the consumer price index in that the GDP deflator includes government goods, investment goods, and exports rather than the traditional consumer-oriented basket of goods.
GDP Growth
Countries seek to increase their GDP in order to increase their standard of living.
The growth in GDP does not result in increased purchasing power if the growth is due to inflation or population increase.

• For purchasing power, it is the real, per capita GDP that is important .
  

While investment is an important factor in a nation’s GDP growth, even more important is greater respect for laws and contracts.