The Gross Domestic Product (or GDP according to abbreviationfinder), is the main existing macromagnitude, which measures the monetary value of the production of final goods and services of a country, during a period of time, normally one year.
GDP (GDP) is the monetary value of final goods and services produced by an economy in a given period. It is also called Gross Domestic Product (GDP).
The term “product” refers to added value; “internal”, meaning production within the borders of an economy; and “gross”, to the fact that the variation in inventories or the depreciation or appreciation of Capital (Economy) are not accounted for.
Methods for calculating GDP
There are three equivalent theoretical methods of calculating GDP:
- Income method.
- Value addedmethod.
GDP is the sum of all expenditures made for the purchase of final goods or services, produced within an economy, that is, purchases of intermediate goods or services and also imported goods or services are excluded.
Value Added Method
GDP is the sum of the added values of the various stages of production and in all sectors of the economy. The added value that a company adds in the production process is equal to the value of its production minus the value of intermediate goods.
GDP is the sum of employee income, business profits, and taxes minus subsidies. The differences between the value of a company’s production and that of intermediate goods have one of the following three destinations: the workers in the form of labor income, the companies in the form of profits, or the State in the form of indirect taxes, such as VAT.
Nominal GDP vs. Real GDP
It must be taken into account that production is measured in monetary terms, for this reason, inflation can make the nominal measure of GDP greater from one year to another and yet the real GDP has not changed. To solve this problem, real GDP is calculated by deflating nominal GDP, through a price index, more specifically, the GDP deflator is used, which is an index that includes all produced goods.
For international comparisons, GDP is usually calculated in dollars. Obviously, this measure is highly affected by changes in the exchange rate, since the exchange rate is usually very volatile. To solve this problem, economists use another method to make international comparisons of different GDPs; This method consists of deflating the GDP using the purchasing power parity (better known as PPP, from the English purchasing power parity).
Domestic Product versus National Product
In the case of the Gross Domestic Product (GDP) the value added within the country is counted, and in the case of the Gross National Product]] (GNP) the value added is counted, by the production factors of national property.
Gross Product (PB) versus Net Product (PN): The difference between the PB and the PN is the depreciation of the capital. The Gross Product does not take into account capital depreciation, while the Net Product does include it in the calculation.
GDP per capita
The GDP per capita is the average Gross Product for each person, that is, it is a magnitude that tries to measure the available material wealth. It is calculated by dividing the total GDP by the number of inhabitants in the economy.