GDP (Gross Domestic Product) profiles to be the final value of the goods and services produced within the geographic bounds of a country during a definite period of time, as in general it is taken up to be a year. GDP growth rate is an important indicator of the economic performance of a country. It is most commonly used to measure economic activity.
The basic concept of GDP was invented at the end of 18th century. The modern concept was developed by the American economist Simon Kuznets in 1934 and adopted as the main measure of a country’s economy at the Bretton Woods conference in 1944.
Calculation of GDP
GDP is measured by taking the quantities of all goods and services produced, multiplying them by their prices, and summing the total. GDP can be measured either by the sum of what is purchased in the economy or by what is produced. Demand can be divided into consumption, investment, government, exports, and imports.
On discussing about the methods, through which GDP can be measured which is by using the production, expenditure, or income approach.
- Production approach: sum of the “value-added” (total sales minus the value of intermediate inputs) at each stage of production.
- Expenditure approach: sum of purchases made by final users.
- Income approach: sum of the incomes generated by production subjects.
The technique/formula to calculate GDP
GDP = private consumption + gross private investment + government investment + government spending + (exports – imports). Based on the four components of demand which is consumption, C, investment,I, government, G, and trade balance, T, —GDP can be measured as follows:
GDP = C + I + G + (X – M)