By calculating the value of goods and services produced in a country, GDP provides a useful metric for understanding the economic momentum between the major factors of an economy: consumers, firms, and the government. There are a few methods used for calculating GDP, the most commonly presented are the expenditure and the income approach.
Both of these methods calculate GDP by evaluating the final stage of sales expenditure or income income. The most well known approach to calculating GDP, the expenditures approach is characterized by the following formula:. The income approach adds up the factor incomes to the factors of production in the society.
It can be expressed as:. This method consists of three stages:. The sum of net value added in various economic activities is known as GDP at factor cost. GDP at producer price theoretically should be equal to GDP calculated based on the expenditure approach.
However, discrepancies do arise because there are instances where the price that a consumer may pay for a good or service is not completely reflected in the amount received by the producer and the tax and subsidy adjustments mentioned above may not adequately adjust for the variation in payment and receipt.
The income approach evaluates GDP from the perspective of the final income to economic participants. Gross domestic product provides a measure of the productivity of an economy specific to the national borders of a country. It can be measured a few different ways and the most commonly used metric is the expenditure approach; however, the second most commonly used measure is the income approach. The income approach unlike the expenditure approach, which sums the spending on final goods and services across economic agents consumers, businesses and the government , evaluates GDP from the perspective of the final income to economic participants.
GDP over time : GDP is measured over consecutive periods to enable policymakers and economic agents to evaluate the state of the economy to set expectations and make decisions. This method measures GDP by adding incomes that firms pay households for factors of production they hire- wages for labor, interest for capital, rent for land, and profits for entrepreneurship.
The U. Two adjustments must be made to get the GDP: Indirect taxes minus subsidies are added to get from factor cost to market prices. Depreciation or Capital Consumption Allowance is added to get from net domestic product to gross domestic product. Alternatively, this can be expressed as:. It measures the value of GDP at factor basic prices.
The difference between basic prices and final prices those used in the expenditure calculation is the total taxes and subsidies that the government has levied or paid on that production. So, adding taxes less subsidies on production and imports converts GDP at factor cost as noted, a net domestic product to GDP. In practice, however, measurement errors will make the two figures slightly off when reported by national statistical agencies.
Gross domestic product GDP due to its relative ease of calculation and definition, has become a standard metric in the discussion of economic welfare, growth and prosperity. However, the value of GDP as a measure of the quality of life for a given country may be quite poor given that the metric only provides the total value of production for a specific time interval and provides no insight with respect to the source of growth or the beneficiaries of growth.
Therefore, growth could be misinterpreted by looking at GDP values in isolation. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income. Goals for more growth should specify more growth of what and for what. The sensitivities related to social welfare has continued the argument specific to the use of GDP as a economic growth or progress metric.
For instance, if a government embarks on the building of a pyramid, which adds absolutely nothing to the well-being of individuals, the GDP framework will regard this as economic growth. In reality, however, the building of the pyramid will divert real funding from wealth-generating activities, thereby stifling the production of wealth. Although GDP provides a single quantitative metric by which comparisons can be made across countries, the aggregation of elements that create the single value of GDP provide limitations in evaluating a country and its economic agents.
Given the calculation of the metric, a country with wide disparities in income could appear to be economically stronger than a country where the income disparities were significantly lower standard of living. However, a qualitative assessment would likely value the latter country compared to the former on a welfare or quality of life basis. GDP across the globe : GDP can be adjusted to compare the purchasing power across countries but cannot be adjusted to provide a view of the economic disparities within a country.
Therefore, GDP has a tremendous big-picture value but policymakers would be better served using other metrics in combination with the aggregate measure if and when social welfare is being addressed. Privacy Policy. Skip to main content. Measuring Output and Income. Search for:. Defining GDP Gross domestic product is the market value of all final goods and services produced within the national borders of a country for a given period of time.
Domestic GDP "Domestic" in "Gross Domestic Product" indicates that the inclusion criterion is geographical: goods and services counted are those produced within the country's border , regardless of the nationality of the producer. National GNP In contrast, "National" in "Gross National Product" indicates that the inclusion criterion is based on citizenship nationality : goods and services are counted when produced by a national of the country, regardless of where the production physically takes place.
It allows us to determine whether the value of output has changed because more is being produced or simply because prices have increased.
GDP can be calculated in three ways: using the production, expenditure, or income approach. All methods should give the same result. GDP is usually calculated by the national statistical agency of the country following the international standard.
It is calculated by using the prices that are current in the year in which the output is produced. In economics, a nominal value is expressed in monetary terms. For example, a nominal value can change due to shifts in quantity and price. The nominal GDP takes into account all of the changes that occurred for all goods and services produced during a given year. If prices change from one period to the next and the output does not change, the nominal GDP would change even though the output remained constant.
The real GDP is the total value of all of the final goods and services that an economy produces during a given year, accounting for inflation.
It is calculated using the prices of a selected base year. To calculate Real GDP, you must determine how much GDP has been changed by inflation since the base year, and divide out the inflation each year. In economics, real value is not influenced by changes in price, it is only impacted by changes in quantity.
Real values measure the purchasing power net of any price changes over time. The real GDP determines the purchasing power net of price changes for a given year. Real GDP accounts for inflation and deflation.
0コメント