"It's time we admitted that there's more to life than money, and it's time we focused not just on GDP but on GWB - general well being."- David Cameron (2006)
Gross Domestic Product or GDP is the total market value of all the final products and services, produced during a specific time period in a country. It is considered to be the foremost parameter of standard of living of a country.
GDP includes government purchases and investments, trade balance (the difference between exports and imports), and consumption. GDP per capita is derived by dividing the gross domestic product by the population of a country. It is used as an indicator of standard of living, while making a comparison between two countries.
According to the Britannica Concise Encyclopedia;
Gross domestic product (GDP), total market value of the goods and services produced by a nation's economy during a specific period of time. GDP is customarily reported on an annual basis. It is defined to include all final goods and services - that is, those that are produced by the economic resources located in that nation regardless of their ownership and are not resold in any form. GDP differs from gross national product (GNP), which is defined to include all final goods and services produced by resources owned by that nation's residents, whether located in the nation or elsewhere.
Simon Kuznets, a Russian American Economist, developed gross domestic product. It was for the 1934 US Congress Report. Many scholars and critics, and Simon Kuznets himself have argued, that economic components that are included in calculating GDP per capita are unscientific, and lack various critical aspects of the economy. Nevertheless, in almost all countries, it is used as a benchmark for measuring a nation's economic progress.
GDP Per Capita
As mentioned earlier, GDP per capita is the value of goods and services consumed by every person in a country. The higher the GDP, the better standard of living. However, this implies only theoretically. The reason behind it, is that there are several factors that are included while calculating GDP. These factors, however, may not be related to a person's income. Thus, GDP per capita is an indicator, and not an exact measurement of standard of living. It is to be understood that there is a drastic difference between GDP and GDP per capita. GDP of China, for instance, is very close to that of US economy, however, GDP per capita of China falls way behind US, due to the huge population of China!
Reporting GDP in USA
In the United States, the Commerce Department releases the GDP report for previous quarter, on the last date of the present quarter at 8:30 AM EST. The GDP is reported in two formats viz., current dollar and constant dollar.
The market value of goods and services, produced in terms of value of today's dollar, is known as Current Dollar GDP. It is used on foreign exchange markets by the traders. However, due to inflation, the Current Dollar GDP is not practicable, as it renders the comparison between two time periods, difficult.
Constant Dollar GDP, on the other hand, converts the current market value into the value of some standard time period or era. This assists in comparing the GDP between two different time periods. Constant Dollar GDP is also known as Real GDP.
Calculating GDP of a Country
To understand the calculation of GDP per capita, it is first important to see how GDP is calculated. There are three ways of determining GDP, and they should yield the same result, at least in theory.
Product Approach: It refers to the total value of goods and services for one year. It is also called Net Value Added or Net Product method.
Gross Value of Output - Value of Intermediate Consumption = Net Value Added
It is calculated for each sector, according to the economic activities. The sum of all such Sectoral Net Value Added gives GDP at Factor Cost.
To calculate GDP at Producer Cost, the difference between Indirect taxes and Government Subsidies are added to GDP at Factor Cost.
Income Approach: It refers to the total income of every individual of a country, during one year. It is also known as Gross Domestic Income, and ideally should be equal to the GDP calculated by Expenditure Approach. To calculate GDI, the following are added:
- Income of farmers
- Wages, compensation, salary or labor charges
- Interest from investments
- Income from non-agricultural businesses
- Corporate profits
Expenditure Approach: It is an accounting method, that determines the total output of a nation by finding the amount of money spent.
GDP = C + I + G + (X - M)
- C = Household consumption expenditures/personal consumption expenditures
- I = Gross private domestic investment
- G = Government consumption and gross investment expenditures
- X = Gross exports (goods and services)
- M = Gross imports (goods and services)
It has to be kept in mind, that GDP is a very technical term, and understanding it deeply definitely requires a lot of research and study. Prominent Nobel prize winning economists like Amartya Sen and Joseph Stiglitz, have criticized GDP as a very poor indicator of a nation's economic progress, as many vital parameters are missed. Nevertheless, it is an ongoing debate among economic scholars and geniuses. For a layman, a good GDP rate, in essence, brings hopes of growth and better opportunities.