Gross Domestic Product (GDP)

For decades, countries have been finding ways to estimate the wealth of their nation and a standardized way of ascertaining the economic development of the nation.

Gross Domestic Product (GDP):

Nowadays, the most commonly used measure to calculate economic growth and economic activity of a nation is through the concept of GDP (Gross Domestic Product). GDP is one of the most common indicators used to track the health of a nation's economy. 

Gross Domestic Product simply put is the total dollar value of all goods and services made within the geographic borders of a nation within a specified time. GDP is a strong indicator of the size of an economy as well as the power it is having in the world stage.

GDP is useful for economists and investors in figuring out the future prospects of a county’s economy. It is also an important tool which helps the government allocate resource to priority sectors and other macro-economic decisions that need to be taken to boost the economy and control inflation rates in the nation.

RankNationGDP In $

There are several ways of calculating GDP, however, the most common one being by the following formulae: GDP = C + I + G + (X – M)

In the given formulae,

C: Consumer spending refers to all the expenditure incurred on goods and services for personal and private consumption. It includes all expenditures done by people to live their daily lives (like expenditure on buying clothes, food and groceries).

I: It refers to all the public and private investments made in the country. It factors in all expenditures incurred by all private businesses to carry out their business activities, these include all the capital investments done by companies (like the purchase of a new factory by an enterprise).

G: It refers to all the expenditure carried out by the government in order to maintain law and order in a nation and all other related activities (money spent on defense like buying aircraft and carriers).

(X-M): It refers to net exports/imports of a nation, i.e. all exports (X) minus all imports (M). This variable can be either positive or negative, depending on if a nation is an export positive or negative country.

Gross National Product:

Gross National Product (GNP) is used to find the economic activity of a country as it factors in net receipts from abroad.

The formula for calculating GNP is as follows: GNP = GDP + (R-P)

In the given formulae,

(R-P): It refers to the net receipts and payments from abroad. R stands for all the receipts from citizens of that nation working abroad. P stands for payments is all the cash that flows from one nation to another nation (like repayment of loans).

GDP is a good but not a perfect indicator of a nation’s economic growth and prosperity, there are some obvious flaws to the concept.

  • GDP doesn’t consider wealth equality and wealth distribution in a nation. This might lead to a misguided statistic on the well-being of a nation.
  • It doesn’t include any volunteer work done by people or non-market goods. For example. a mother babysitting a child.
  • It does not consider the health and standard of living of the people in the country. It only does a superficial review.
  • It does not include the environmental impact like pollution that these economic activities create.
  • GDP is very complex to calculate and there are several logistical and mathematical barriers to calculating the same. It is a very labour and data-intensive method to calculate the GDP of a nation.

There are several newer methods that are been used in order to calculate the economic growth and economic activity of a nation.

  • GDP Per Capita: GDP per Capita is calculated by dividing the total GDP of a nation by the total population of a country. It is a better depiction of the standard of living of a nation and the total well being of its people.
  • Gross Happiness Index: This index was developed by the Bhutanese government with the aim of actually measuring the collective happiness and well-being of a nation. This index factors in the health, mental and social well being and the environment of the people.
  • Gini Index: This is an index developed to find out the wealth inequality in a nation and the distribution of wealth among a population. It is calculated by finding the cumulative population of a nation and plotting it with the percentage of total wealth held by them. For example, the top 1 % of the population holds 30% of the nation’s wealth.
  • Human Development Index: This model has been recommended by the UN. It is calculated by taking the weighted average of three factors: national income per capita, the average life expectancy of its citizens and the education of its citizens. This approach factors in the GDP and well being of its citizens.

GDP is a strong indicator of the financial health of a nation. Despite some of its flaws, it’s a very powerful tool for measuring the strength of a nation and the standard of living in the nation. Calculating GDP is a very labour-intensive and complex process. However, governments invest a lot in developing a structure to calculate the most accurate figure of GDP they can.

GDP is deemed to be a capitalist model for increasing the GDP of a nation. It's given too much importance without considering the impact it creates on the environment and the overall health and wellbeing of its citizens. However, an increase in the GDP of a nation generally co-relates with an improvement in the standard of living of a nation as well, but this improvement by now always be evenly distributed amongst its citizens.

Though newer models are coming up with plans for replacing GDP, however as of right now, GDP is the best and the most widely used method to find the economic growth of a nation.

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