Understanding Gross Domestic Product (GDP) in Macroeconomics
You might have often heard people talk about GDP growth rates and what led them to rise and fall. But have you ever wondered what GDP is and what its significance is to an economy? Well, you will find the answers to these questions in this segment, which will help you understand the importance of GDP and learn about its components.
GDP, broadly, is one of the ways to measure national income, which indicates the total income of an economy. In the upcoming video, you will learn about the concept of GDP in detail as Chris walks you through its components and talks about how it can be measured.
So, in the video, you learnt that GDP is the market value of all final goods and services produced within a country in a given period of time, usually one economic year (EY).
You also learnt that GDP is calculated using the formula: Y = C + I + G + (X – M), where
- Y = GDP,
- C = Total consumption,
- I = Total investment,
- G = Government expenditure,
- X = Total exports and
- M = Total imports.
GDP is an important consideration for businesses that are planning to invest in other countries, as it is an important indicator of a country’s economic health:
- A high GDP indicates a thriving economy, in which businesses would prefer to invest.
- Likewise, a low GDP indicates a weak economy, and businesses would need to weigh their risks before investing in such economies.
One of the reasons why the US economy can be considered as a thriving economy is that it is the largest economy in the world, as measured by GDP. As per data from The World Bank (2018-19), you can verify that at the size of the US economy as measured by the GDP is about 21 trillion dollars and the average rate of growth for the US in the past few decades has been around 2.9 % p.a.
Let us now look at the ways/approaches in which the GDP of a country can be expressed.
So, in the video, you saw how each of the approaches to measure GDP has its own meaning and importance. You learnt, primarily, about the following two approaches to measure the GDP of a country:
- Expenditure approach: This approach involves adding up the money spent on the components included in the formula for calculating GDP, as discussed above.
- Output approach: This approach involves determining the total output of a country by directly finding out the total value of all the goods and services that it produces.
In the video, you learnt about the various sectors that form a part of GDP and also learnt that businesses should be prudent about identifying the sectors in which they want to operate, in a particular country.
Now, in the upcoming video, you will learn about the various other ways/approaches to measure the GDP of an economy.
So, in the video, you learnt about the alternative approaches to measure an economy:
- GDP per capita: It is a measure of a country’s economic output, which accounts for the number of people in that country.
- Real GDP: It is the nominal GDP adjusted for inflation. It can help businesses know how a country is growing in a manner that reflects the underlying economic activity.
- Gross National Product or GNP: It basically takes into account the GDP and also the income from abroad.
- Net National Product or NNP: It is calculated by deducting the depreciation in the values of the factors of production.
In the next segment, you will learn how some economies perform better than others through the concept of Productivity.
Additional Learning
You might be thinking that if GDP is such an important metric, then a higher GDP would mean higher economic growth and, thus, higher average wealth and happiness in a country. However, that is not always the case. Read this article on the website of the World Economic Forum to know more about this.