What is GDP, a key measure of a country’s economy?
GDP is a measure used to show how a country’s economy is doing. It is also used to compare economies between nations. However, what is GDP? Its definition and relevance are not very clear to most citizens.
GDP, which stands for gross domestic product, is the value of all final goods and services produced in a country within a given period of time. With this value, the economy can be analyzed by branches of production and also in the expenditure of the countries.
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GDP includes all production that takes place in a specific country, regardless of whether the origin of the company’s capital is international. To make this calculation, the final product or service manufactured in the country is taken into account, without being affected by the place of origin of its raw materials.
However, when talking about GDP, certain distinctions are made: nominal GDP, real GDP and GDP per capita.
What is nominal GDP? This concept refers to the value of GDP at current prices, i.e. at the current prices of goods or services.
Real GDP, on the other hand, is the value of goods and services produced in a country during a year and its value is given in real prices, i.e. it does not include inflation. For this reason, and according to Banco de la República, real GDP is a good indicator to measure a country’s economic activity because it does not take into account price variations but the change in the production of goods and services.
Finally, what is GDP per capita? This measurement shows the level of wealth of the population, so it is a very useful value to see the economic standard of living of people in different countries, however, and because it is an average, it does not reflect the real condition of life because it divides the GDP of a country (usually the nominal GDP) by the number of its resident inhabitants.
We already know what GDP is. Let’s now talk about its importance
This macroeconomic measure was created by the Russian-American economist Simon Kuznets, in 1934, who had already worked on the design of a system to unify the national accounts of the United States based on the relationship between economic growth and income distribution.
Although Kuznets was very critical of the idea of taking GDP per capita income as a reference for measuring welfare, the modern concept of gross domestic product was adopted as the main tool for measuring the economy of nations at the 1944 Bretton Woods Conference, held in the U.S. state of New Hampshire.
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Thus, the gross domestic product turned out to be one of the most important indexes to measure a country’s economy and compare it with that of other countries. It is one of the most widely used indexes in the world.
In contrast, if the GDP is negative, it is an indicator of economic stagnation and if this behavior is maintained for more than two consecutive quarters, experts will start talking about recession.
In addition to analyzing the country’s entire economy, it is also very useful to evaluate the activity of the different branches of production, with which we can see the performance and contributions to economic growth.
There are twelve branches of economic activity:
- Agricultural
- Mining and quarrying
- Manufacturing industries
- Electricity, gas, steam and air conditioning; water distribution; sewage, wastewater and waste treatment and sanitation activities
- Construction
- Wholesale and retail trade
- Information and communications
- Financial and insurance activities
- Real estate activities
- Professional, scientific, technical, administrative and support service activities;
- Public administration and defense; Education; Human health care and social services
- Artistic, entertainment, recreational and other service activities; Other service activities
After determining the branches of economic activities, it is possible to calculate how much each one contributes to GDP. An example of this is the GDP of the textile industry, which is found within the manufacturing industries.
To perform the exercise, there are three variables in the calculation that will reveal the GDP: gross value added, taxes and product subsidies. Gross value added is the sum of sectoral production.
GDP= gross value added + (taxes – product subsidies)
With this measurement it is possible to compare and see the evolution of production between economic branches and between time periods and to know if the country is moving forward or backward in productive terms.
In addition, analysts can also see the levels of spending, also known as aggregate demand, which is broken down into private consumption, public consumption, gross capital formation and net exports (exports – imports).
Expenditure GDP = private consumption + public consumption + gross capital formation + net exports
This calculation makes it possible to see the disaggregated contribution of spending by all economic actors to a country’s economy. It is also possible to see the evolution of the variables.
