We explain what the gross domestic product is and how this variable is calculated. Also, what are its characteristics and GDP per capita?
What is Gross Domestic Product?
Gross domestic product (GDP) is called a variable of macroeconomic analysis that expresses the total financial value of production of goods and services of final demand that corresponds to a region or a country, accounted for in a specific period of its history.
This means that the GDP is the equivalent of the productive economic forces of a country , expressed in money and based on what is recorded by the national accounts of that country. And it is used as a scale to measure and compare macroeconomic performance.
It is one of the most important economic magnitudes in contemporary analysis , despite the fact that it has recognized limitations and cannot be taken as a reflection of life in the country.
Characteristics of gross domestic product :
The Gross Domestic Product was invented by Simon Kuznets , also the creator of the United States Unified System of National Accounts and winner of the Nobel Prize in Economics in 1971, who had been working for years on patterns for measuring economic growth and income distribution.
Despite the success of his concept, widely used by economists and journalists in the world , Kuznets was explicit in his consideration that the welfare state of a country cannot be measured solely by its economic growth, as is usually done by exploring the base of the per capita income derived from GDP.
Definition of GDP
The GDP is the sum of all the goods produced and final services offered by the country or region in a specific period of time (generally one year), both by national and foreign companies , both public and private.
Numerous derived calculations can then be made with this macroeconomic coefficient , to obtain its variability rate, its per capita distribution or the trade balance, among others. It turns out to be an extremely useful and versatile concept in the study of economics .
It should be explained that GDP is a magnitude of flow or current , that is, it is calculated based on the goods produced during the chosen period, without taking into account the stock or fund, that is, the wealth that is had from previous periods. .
In this sense, it is a magnitude inseparable from time , since the wealth that remains (patrimony) is of another macroeconomic order.
Another important consideration is that GDP takes into account only final production, not intermediate production . That is, those goods or services that go to the final consumer , not that form intermediate steps in the production chain or act as raw material for other processes.
How is GDP calculated?
GDP can be determined based on three different approaches:
- Based on expenses. All the final demands for goods and services of the period to be measured are added up, based on four large spending items: family consumption (C), government spending (G), investment in new capital (I) and the net results of the trade balance. : total exports (X) minus imports (M). The GDP formula in that case would be: GDP = C + G + I + (X – M)
- Based on income or distribution. All the income from all the factors involved in the country’s production chain is added up, before taxes are deducted. In this case the formula would be: GDP = R L + R K + R R + B + A + ( I i – S b ), where RL represents labor wages , RK income from capital or land, RR the financial interests, B the profits, A the amortizations, Ii the direct taxes and Sb the subsidies.
- Based on the offer or the added value. In the latter case, the GDP is calculated based on the net contribution of each economic sector of the country, adding the values added to the product during each step of the productive circuit.
Since the GDP reflects the economic power of a country , by measuring its variation in a given period, it can be calculated whether the economy of that country grew or contracted. The percentage rate of variation is calculated based on the formula:
tn = [ (GDPn – GDPn-1) ÷ GDPn-1 ] x 100
Where GDPn is the measurement of the first year and GDPn-1 that of the following year.
GDP per capita
Another common calculation is the Gross Domestic Product per capita, that is, the per capita income or income per capita or GDP per capita . This magnitude is used to measure the economic wealth of the country’s citizens . And it is calculated simply by dividing the GDP by the number of inhabitants:
GDP pc = GDP / N
There are two fundamental types of GDP, whose distinction is important when making historical comparisons and avoiding distortions in the calculation due to inflation (since goods and services, being so dissimilar, must be expressed economically in currency ). These are:
- nominal GDP. It is the one that is calculated by adding the monetary value of all goods and services produced at current prices in the year in which they were produced.
- actual GDP. It is identical to the previous one, but the monetary value is expressed at constant prices, that is, at the prices of the year in which the comparison is made.
As its creator warned, the index that the GDP represents cannot really be taken as an indicator of prosperity or well-being for the people, but only as an indicator of economic movement.
The GDP leaves out numerous social, cultural, political variables and even some economic variables such as self-consumption or self-production, volunteering, the economic value of public assets and liabilities, or anything that is not strictly material.
Indicators similar to GDP that is also related to the economy and the performance of countries are:
- Green GDP. It is calculated by subtracting from GDP the ecological, biological, or pollution damage that said economic activity has generated.
- Human Development Index. Prepared by international institutions such as the UN, it includes GDP per capita along with life expectancy and the national education rate.
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