Gross Domestic Product

GROSS DOMESTIC PRODUCT (GDP)

In economics, GDP means Gross Domestic Product. GDP is defined as the value of all goods and services produced within the country of an economy in a given period. GDP is derived from GNP, or Gross National Product, which is defined as the value of goods and services produced in a given period by factors of production owned within an economy. In more simple words, GDP measures income generated within a country whereas GNP measures income received within it. GDP and GNP are the most commonly known measures of national income and output. Nominal GDP is a measure of money spent. Real GDP corrects the gross nominal GDP figure for inflation, making real GDP more useful for historical comparison. Nominal GDP is sometimes called money GDP, and real GDP is sometimes called inflation-corrected GDP or constant price GDP.

The change in GDP from one year to the next can be given as a percentage. This is called the GDP growth rate. The real GDP growth rate is a much more useful measure of economic growth than the nominal rate. If a country's GDP is growing at a nominal rate of 5% but inflation is running at 4%, only 1% of the growth is down to improved economic output. The rest is just because prices of goods and services went up. The GDP shows how well a particular country is doing economically. One benefit of GDP is that, it can only measure what the government has measured. Anything traded without the government knowing won't be included in the GDP, which can be significant in some countries.

Gross Domestic Product (GDP) can be estimated in three ways. They are Expenditure basis, how much money was spent, Output basis, how many goods and services were sold, and Income basis, how much income was earned. If indirect taxes are deducted from the market prices and subsidies are added, it is called GDP at factor cost or national dividend. If depreciation of the national capital stock is deducted from the GDP, it is called net domestic product. If income from abroad is added, it is called gross national product (GNP). The main criticisms of GDP as a realistic guide to a nation's well-being are that it is pre-occupied with indiscriminate production and consumption, and it includes the cost of damage caused by pollution as a positive factor in its calculations, while excluding the lost value of depleted natural resources and unpaid costs of environmental harm.

The total market value, measured in constant prices, of all goods and services produced within the political boundaries of an economy during a given period of time, usually one year. The key is that real gross domestic product is measured in constant prices, the prices for a specific base year. Real gross domestic product, also termed constant gross domestic product, adjusts gross domestic product for inflation. You might want to compare real gross domestic product with the related term nominal GDP.

REAL GDP CALCULATION METHOD

Nominal GDP is calculated by summing the value of goods and services produced in a given year using the prices of these outputs in that year. If the general price level increases or decreases from one year to the next, it is difficult to compare the amount of output that a country produces across different years. To correct for this, we want to value output in every year using the same prices. In other words, we calculate real GDP.

Consider the following example:

Nominal GDP for each of three years is as follows:

2001: RM10 billion

1996: RM7 billion

1968: RM1 billion

In order to calculate real GDP for each year, we need to first pick a base year. We will use 1996.

For each year (except the base year), we calculate a GDP deflator, which is a number, that, when divided into nominal GDP and multiplied by 100, yields the real GDP for that year. Precisely,

The GDP deflator is calculated by the following technique:

1. Construct a "basket of goods." This basket represents things that an

Average family purchases in a year. For our example, we will not specify the make-up of this basket, but assert that it exists.

2. Value this basket of goods in each year using prices in each year. For example, assume that the basket is valued in each year as follows:

2001: RM1, 085,100

1996: RM1, 000,000

1968: RM260, 000

3. Calculate the deflator for each year (except the base year) using the following equations:

GDP deflator (2001) = [(value of basket 2001)/ (value of basket base year)]*100

= [(RM1, 085,100)/ (RM1, 000,000)] * 100 = 108.51

GDP deflator (1968) = [(value of basket 1968)/ (value of basket base year)]*100

= [(RM260, 000)/ (RM1, 000,000)]*100 = 26

We can now calculate real GDP for every year in 1996 dollars. Note that real GDP for the base year is equal to the nominal GDP for that year.

Real GDP 1996 = RM7 billion

Real GDP 2001 = (RM10 billion/108.51)*100 = RM9.216 billion

Real

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