GDP Full Form is Gross Domestic Product. GDP is the main indicator that helps to gauge the economy of a nation. It stands for the total value of all services and goods produced for a given period. It can also be thought as the size of the economy of a country. In general, GDP is projected in comparison with the preceding quarter of the year.
GDP can be approximated in three ways to give out identical figures which include (1) Based on Expenditure – The amount of money spent, (2) Based on Output – The number of goods and services sold, (3) Based on Income – The amount or percentage of profit earned. GDP is constantly revised in order to obtain greater accuracy. GDP not only helps to measure the economy of a country but also helps to measure the contribution of industrial sector relatively.
GDP Full Form – Additional Information
Gross Domestic Product is a popularly used monetary measure of the value of all the finished goods or services that are manufactured or produced in a particular period (either yearly or quarterly). Nominal GDP calculations are generally used for the determination of the performance of the country or a particular region in terms of economics.
It is also utilized for the purpose of making comparisons. The issue with nominal GDP is that it does not highlight differences in the inflation rates and the cost of living of the countries being compared. This problem makes it a less feasible option in this respect and therefore GDP PPP per capita basis model is used while distinguishing between living standards of various nations concerned.
It is to be understood that GPD does not provide for an absolute calculation of economic activity. It provides for an account of final output or value that is added at every level of production but does not highlight total sales or total output during the whole production process. In the United States of America, BEW (which stands for the Bureau of Economic Analysis) has formulated a fresh quarterly statistic, which is known as gross output (abbreviated as GO), which is a better measure that includes total revenues or sales obtained at all levels of production. GO has been strongly advocated by Mark Skousen. Many countries have started adopting the new measure.
Presently, the largest GDP is of the United States of America in the American continents; Germany in the European region; Nigeria in the African continent; China in Asia; and Australia in Oceania region. There are many aspects of GDP that need to be dealt with because it is not a simple conceptper se. So, here are five things you must know about GDP:
History behind GDP
The history of GDP can be traced back as far as the 17th century. It was William Petty who first introduced the concept of GDP for the purposes of defending landlords against the imposition of unfair taxation policies at the time of war between the English and the Dutch. The concept was developed and given fine edges by Charles Davenant in the year 1695. The concept of modern day GDP was reported in a US Congress report in the year 1934. It was developed by Simon Kuznets.
Post Bretton Woods Conference in the year 1944, GDP became a popular tool for the measurement of the economy of a country. During that period, the Gross National Product (abbreviated as GNP) was prevalent but the switch became rampant in the 1980s. The GNP was restricted to the measurement of the production done by the citizens of a country within and outside and did not take into consideration residential institutional units. The history of GDP is old and rich as there have been many instances in history where a similar concept has been put to use for measurement of economic activity.
Production approach of GDP
One of the ways for the determination of GDP is the Production approach. It is most direct of all other approaches namely, the expenditure approach and the income approach. In this type of approach, there is summing up of outputs obtained from every class of enterprise for the purposes of arriving at the total. This approach is close to what has been formulated by the Organization for Economic Co-operation and Development (abbreviated as OECD).
The approach comprises the following:
- It estimates the gross value of the output generated domestically from among various activities.
- It causes the determination of the intermediate consumption, which is basically the cost of supplies, material, and services that are used for producing finished goods or services.
- It causes a deduction of intermediate consumption from the gross value for obtaining the added gross value.
For the purposes of measuring output generated from domestic goods or services, economic activities have been categorized into different sectors. Upon categorization of economic activities, the output from each sector is estimated with the help of either of the following methods:
- By multiplication of the output of every sector according to their respective market prices and then the addition of them together.
- By collection of data based on inventories and gross sales obtained from the records of companies and then additional of all of them together.
The gross value obtained from every sector is added for obtaining the Gross Value Added (abbreviated as GVA).
The second method for determination of GPD is Income Approach. It is basically sum of the primary incomes that resident producer units distribute. This method makes use of incomes that companies and firms pay to households in the form of wages, rent for land, interest for capital, profits for businesses, etc. In the United States of America, incomes include corporate profits, incomes of farmers, interest on incomes, salaries and wages to labor, income generated from non-agricultural businesses.
The third method of determining GDP is the expenditure approach. In this method, the GPD is calculated by adding the final usages of goods or services (except that of intermediate consumption) that are calculated at purchasers’ prices. The underlying principle in this method is that most products are manufactured for the purpose of sale thus, measurement of total expenses for buying products is one way to calculate production.
Cross-border comparison and PPP
The GDPs of different countries can be compared by means of conversion of the value of the national currency in accordance with the prevalent currency exchange rate or PPP (which stands for Purchasing Power Parity) exchange rate. For greater clarification, Currency Exchange Rate refers to the exchange rate used in International Foreign Exchange Market. PPP exchange rate refers to the exchange rate which is the exchange rate relied on the Purchasing Power Parity of a currency relative to a chosen standard (that is generally the US Dollar). It is more of a theoretical method of comparing the GDPs.