Gross Domestic Product(GDP)
Economic growth is measured in terms of an increase in the size of a nation's economy. A broad measure of an economy's size is its output. The most widely-used measure of economic output is the Gross Domestic Product (abbreviated GDP).
GDP generally is defined as the market value of the goods and services produced by a country. One way to calculate a nation's GDP is to sum all expenditures in the country. This method is known as the expenditure approach and is described below.
Alternative Approaches to Calculating GDP
There are three approaches to calculating GDP:
- expenditure approach - described above; calculates the final spending on goods and services.
- product approach - calculates the market value of goods and services produced.
- income approach - sums the income received by all producers in the country.
These three approaches are equivalent, with each rendering the same result.
Final Sales as a GDP Predictor
Note that an increase in inventory will increase the GDP but possibly result in a lower future GDP as the excess inventory is depleted. To eliminate this effect, the final sales can be calculated by subtracting the increase in inventory from GDP. The final sales can be either larger or smaller than GDP. The change in inventory is an important signal of the next period's GDP.
GDP Growth
Countries seek to increase their GDP in order to increase their standard of living. Note that 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.
GDP versus GNP GDP measures the output of goods and services within the borders of the country. Gross National Product (GNP) measures the output of a nation's factors of production, regardless of whether the factors are located within the country's borders. For example, the output of workers located in another country would be included in the workers' home country GNP but not its GDP. The Gross National Product can be either larger or smaller than the country's GDP depending on the number of its citizens working outside its borders and the number of other country's citizens working within its borders. |