GDP or Gross domestic product is the value of the entire product and services produce by a country in a given period of time. GDP consider the current value for measurement of GDP called current market value. GDP used by every country to measure their economy, currently USA is the largest economy having GDP of 13.13 trillion dollars. GDP often measure in monetary terms rather then quantity, aircraft produce by USA and aircraft produce by china are not counted as same in GDP because their monetary value differ. Aircraft of USA might cost $80000 and china aircraft $40000 in this scenario GDP of USA is higher than china.
GDP = consumption + gross investment + government spending + (exports − imports)
GDP = C + I + G + (X-M).
Gross word is used because depreciation is not subtracted form the final value of all goods and services produce by the country. Less the amount depreciation form GDP is called net domestic product. Double counting problem may increase the value of commodities which reflect the GDP. For example, two companies are involve in car production, one company only supply tires for the car and second company manufacture the car , if the value of tires is already included in GDP then it should be subtracted from the car total cost.
Components of GDP
Following are the components to measure the Gross domestic product.
It usually denotes the private consumption, such as the household expenditures (food, rent etc)
This is the amount that firms and some households invest as capital. Such as spending of households in making new houses, business firm doing a construction on a certain field for its business operations.
Government Spending (G)
It is the sum of government expenses regarding the services and the final goods, which mainly includes purchase of military arms and weapons, public servant salaries and investment of the government in any field.
GDP calculates the amount a country produces, that include goods and services produced for any other nations’ consumption, due to the surplus amount that has been produced after which therefore exports are added.
Since imported goods will be included in terms like G, I, or C, it is of vital importance that export must be deducted in order to avoid counting foreign supply as domestic.
GDP VS GNP
GDP is the total value of good and services produce in the country whereas GNP is total value of good and services produce in the country and also add the value of commodities produce by the people of the country in foreign.
Methods of Measuring GDP
Gross domestic product is measured using three methods as mentioned below.
The Expenditure Approach – The sum of total spending on producing good and services, GDP using this method can be calculated by sum up consumption, Government spending,Invest and exports deducting imports.
The Income Methods – Measuring GDP by Calculating the income of people who are responsible for producing the good and services.
Product Approach – Total value of product and services product in the country.