By Hrishikesh Menon. Edited by Arjun Chandrasekar.
Overview
GDP stands for Gross Domestic Product. It is the total market value of finished goods and services created in a country. It is also an indicator of the size and health of a country’s economy.
GDP Reports
Governments around the world have special commissions or entities which calculate estimates for respective national GDPs on an annual and/or quarterly basis. In the United States, the Bureau of Economic Analysis (BEA) carries out this process. There are 2 types of GDP reports: nominal reports and real reports. Nominal reports are for economic production in an economy including price changes due to inflation. Real reports are for economic production without including inflation. Although nominal reports are projected more to the public, real reports show the raw growth of a country’s growth. For example: in 2020 Q4, the US nominal GDP was around $21.4 trillion and in 2021 Q1, it increased 3.3% to $22.1 trillion. When calculated with real GDP values, in 2020 Q4, the GDP was around $18.8 trillion and in 2021 Q1, a mere 1.6% increase to $19.1 trillion. In this scenario, the real GDP growth was around half the growth shown by nominal GDP values.
GDP Per Capita
GDP per capita is a metric for GDP per person in that country. This value is an indicator of the financial well-being of the people of the underlying country. Smaller populations which have higher GDP per capita are known to live in a self-sufficient economy. Some examples of countries like these are: Qatar ($62k), Macau ($84k), Luxembourg ($114k), Singapore ($65k). GDP per capita is reported in three ways: nominal, real, and PPP. Nominal and real reports have the same definitions here as they did when explained in GDP reports: nominal reports account for the GDP per person including inflation and real reports exclude inflation. PPP stands for Purchasing Power Parity, and they are rates of currency conversion which indicate the purchasing power in a country’s currency compared to international dollars.
Calculating GDP
There are three ways to calculate GDP: expenditure approach, production/output approach, and income approach. The expenditure formula is GDP = C+G+I+NX. C stands for consumption which is the value for consumer spending within the country. G stands for government spending which is the amount spent by administrations for infrastructure, payrolls, agencies, and any other bureaucratic programs which need funding. I stands for investment which is the capital expenditure or investment made by private businesses in the country. NX stands for net exports which is the value resulting from the difference of total exports and imports of a country. This is the primary method of GDP calculation.
Another way is the product or output approach. This approach is the opposite of the expenditure approach. The expenditure approach is based on the spending whereas the product approach is focused on the production and output of goods and services within a country.
Finally, the income approach, which focuses on the economic income of a country through various factors. Some factors which are included are rent earned on land, corporate profits, return on capital in terms of interest, labor wages, etc.
Conclusion
In short, GDP is the total market value of all finished goods and services in an economy. It is also an indicator of a country’s economic well-being. GDP is reported in nominal or real terms: nominal reports include inflation whereas real reports do not. GDP per capita is the GDP per person living in the underlying country, and is reported in nominal, real, and PPP terms. This is an indicator of the financial health of every person in the country. Smaller populations in developed economies generally have high GDP per capita. Finally, GDP is calculated in 3 ways: The Expenditure approach, the Product/Output approach, and the Income approach. We hope this article helped in any way and if you’d like to learn more about business and finance, be sure to check out the other articles!
