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Gross Domestic Product

General Definition

The GDP or GDI, acronym for Gross Domestic Product and Gross Domestic Income respectively is the measure of a nationwide income and production or output in a given nation’s economy. It is simply the sum value of all goods and/or services produced within a specified economy, the currency value of all the finished goods and/or services produced within a country, over a given period of time, normally a year. GDP therefore entails all government expenditure, public consumption, investments and the exports less imports that transpire within a stipulated territory.

Conceptual definition

GDP can be explained in three ways which are all identical theoretically. Firstly, GDP equals the sum total of the value added at all intermediate production stages, by all industries in a country, in addition to taxes, and subtraction of subsidies on the products in the given period of a year. Secondly, it equals total expenditure for all end products produced in a country within the specified time. Thirdly, it equals the total income made by the country’s production; this entails employee remuneration, taxes imposed on production, minus subsidies and the profits.

Illustration

Gauging and quantifying the Gross domestic product can be approached through the expenditure method whereby:

C + G + I + (N-X) = GDP

“C” represents all private consumption, or consumer spending, in a country’s economy
“G” is the total value of what the government spends
“I” is the total value of all the capital the country spends on businesses
“NX” represents the country’s total net exports, summed up as total exports less total imports.

Living standards and GDP

The two main reasons of gross domestic product are to point out the economic health of a stipulated economy and to point out the general living standard of the same. However, opponents of using GDP as a measure of the economic health of a country argue that for whatever reasons, some transactions end up not reported to the government thus saying that the statistics do not incorporate the underground economy’s transactions. Still, others claim that GDP shouldn’t gauge the material wellbeing, but should gauge the productivity of the country, whereby it is not connected.

GDP per capita is often used as an indicator or pointer of the standards of living in a given economy, the logical being that all citizens ought to and would benefit from their economy’s increased output. The main advantage of using GDP per capita as a pointer of an economy’s standards of living is that it is regularly, constantly and widely measured. In fact, most countries provide the gross domestic production on quarterly basis.

Another advantage of using GDP as a pointer of the standards of living is that it is not in itself a gauge of the standards of living. The main intention of GDP is to measure particular kinds of economic activities in an economy. For instance, in an economy which exports 100% of all its output and imports nothing, the GDP would still be high, but the economy will experience pitiable standards of living.

Economics equally tend to argue that using GDP is not necessarily the better indicator of the standards of living in an economy, but rather that, (given all other variables remain constant), when GDP per capita increases, the standards of living tend to also increase. Arguably, as the output of employees’ increases, it is only fair that employers vie for them by remunerating higher wages, and if the output is low, then obviously the remuneration package must also be low, lest the business runs at a loss. For that reason, it makes GDP per capita a substitute for the standard of living and labor productivity, rather than a direct measure of either of them.

Tags: Economics, government, Income, tax

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