Gross Domestic product or GDP is often mentioned in regards to a country’s finances and economy. But what exactly is it? This guide will tell you the basics of what you need to know.
What is it Gross Domestic Product (GDP)?
The term Gross domestic product was first used in 1934 by a United States congressman called Simon Kuznets. It stands for the market value of all officially produced goods and services produced within a country.
GDP is used as a measure of a country’s standard of living but is not used to measure personal income. In theory GDP should equal Gross domestic income (GDI). Today GDP is used as the main measure for a nation’s economy.
How to determine GDP
GDP can be determined by three methods. In theory each of the methods should all give the same results. These methods are the income approach, expenditure approach and production approach.
This method is also called Gross Domestic Income and measures GDP by adding incomes that firms pay households for factors of production they hire- wages for labour, interest for capital, rent for land and profits for entrepreneurship, or put more simply GDP is the sum total of incomes of individuals living in a country during 1 year.
This approach takes into account all of the expenditure made by an individual over a year long period. This is a good indication of production as it shows how much disposable income is available in the economy.
This approach is the market value of all goods produced over the course of a year.
This approach is also called the Net Product or Value added method and consists of three stages:
- Estimating the Gross Value of domestic Output in various economic activities;
- Determining the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services, and finally;
- Deducting intermediate consumption from Gross Value to obtain the Net Value of Domestic Output.