Gross Domestic Product (GDP)

Gross domestic product, or GDP, is the key economic indicator of a nation. It measures the total value of final goods and services produced within a given country's borders. It is the most popular method of measuring an economy's output and is therefore considered a measure of the size of an economy. When people say one economy is larger than another or that an economy is growing or shrinking, usually they're referring to GDP figures.

GDP is defined as all consumption by households, all investment by businesses, and all purchases by the government, plus purchases made by foreigners minus purchases of things made abroad.As an aggregate measure of total economic production for a country, GDP represents the market value of all goods and services produced by the economy during the period measured, including personal consumption, government purchases, private inventories, paid-in construction costs and the foreign trade balance (exports are added, imports are subtracted).

GDP is important because it gives a bird's-eye view of how an economy is doing. If GDP speeds up, it can be a sign that good things are happening or are about to happen in a number of areas — people getting more jobs or better pay, for example, or businesses feeling confident enough to invest more. It's not a complete picture of a national economy by any means, but it's a good start at a quick summary.

GDP = C[onsumption] + I[nvestment] + G[overnment purchases] + X [exports] - M [imports]

Alternative ways of calculating GDP

There are three approaches of calculating GDP

·        Expenditure approach- As above, calculates 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.

GDP per capita

An approximation of the value of goods produced per person in the country, equal to the country's GDP divided by the total number of people in the country.

GDR

Global Depositary Receipt. A negotiable certificate held in the bank of one country representing a specific number of shares of a stock traded on an exchange of another country. American Depositary Receipts make it easier for individuals to invest in foreign companies, due to the widespread availability of price information, lower transaction costs, and timely dividend distributions also called European Depositary Receipt.

Difference between GDP and GNP

GDP measures all of the sales of final goods and services domestically — within the country’s borders — plus exports and minus imports. GNP counts, production by workers or owned enterprises wherever they are located, but excludes production by foreign people or foreign-owned enterprises even if they are located in the same country. In the United States, GNP was used until 1990s, when it changed to GDP in order to be consistent with other nations.

Difference between GDP and GDI

Conceptually, GDP (the value of everything produced) and gross domestic income (the value of everything earned by producing things) are identical. But in terms of the construction of statistical series, GDP is assembled by adding up spending on final goods and services while GDI measures aggregate income — wages and profits.

GDI = W[ages] + R[ental income] + I[nterest income] + P[rofits]

Nominal GDP vs Real GDP

Normally, GDP calculation gets distorted with inflation. This unadjusted GDP is called nominal GDP. In order to get real GDP, the nominal GDP is divided with a price deflator.

Note, in an inflationary environment, the nominal GDP is greater than real GDP. If price deflator is not known, an implicit price deflator is calculated by dividing nominal GDP by the real GDP.

GDP growth

GDP growth is very essential for the well-being of a nation.Note, growth in GDP does not result in increase in purchasing power if the growth is due to inflation or population increase. For purchasing power, it is the real, per capita GDP that’s important.

No one thinks GDP is perfect, and so many people/places have come up with their own ways to measure the economy, ranging from tweaks to full-on overhauls. Here are just a few of the many examples out there:

GDP Plus — Promoted by the Philadelphia Fed, GDPplus is a way of combining information from both GDP and GDI, creating a less-noisy series of growth estimates.

Green GDP — China introduced this measure in 2006 to measure its economic growth while accounting for environmental damage. The nation soon discontinued it, when the measure showed that growth in some areas was near-zero under the measure.

Genuine Progress Indicator — This indicator measures lots of the things that are not included in GDP but can profoundly affect people's lives, like volunteering, pollution, crime, and income distribution. The idea behind GPI isn't so much to measure the size of the economy, as GDP does, as it is to measure how people are experiencing life within an economy. Maryland and Vermont have both adopted this as one measure of well-being in their states, and other states are considering it as well.

Gross National Happiness — Bhutan famously measures how happy its citizens are, and has done so since the 1970s. The country measures well-being across several areas: education, psychological well-being, and good governance, for example. However, it appears GNH's importance may be waning. Bhutan's latest prime minister has signaled that he will focus more closely on GDP.