Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is a measure of economic activity within a country. It is the total value of all goods and services produced over a specific time period within a country's borders. It is a comprehensive measure, covering the production of consumer goods and services, even government services, and investment goods.

Definition

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.

Calculation

GDP can be calculated in three ways, all of which should, in principle, give the same result. They are the production (or output or value added) approach, the income approach, or the speculated expenditure approach.

The most direct of the three is the production approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors ("producers," colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes.

Uses of GDP

GDP is an important figure as it is a measure of the economic activity within a country, it is used by economists to compare the economic performance of different countries, or of the same country over different periods of time. It can be used to compare the living standards in different countries, as it is a measure of the economic activity per person in the country.

Limitations of GDP

While GDP is a useful measure, it has its limitations. For example, it does not take into account the distribution of income within a country, so a country with a high GDP might still have a large number of poor people. It also does not take into account the informal economy, which can be significant in some countries. Furthermore, it does not measure the sustainability of growth. A country may achieve a temporarily high GDP by over-exploiting natural resources.

See Also

• Economy
• Economic Growth
• Economic Indicators
• National Income
• Gross National Product (GNP)

References

Gross Domestic Product (GDP) Resources
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