How is the GDP measured?

Transcription

1 What does GDP mean? How is the Gross Domestic Product of a country measured? GDP (Gross Domestic Product) is a measure of country's production or income. You can simply understand this as the sum of incomes all people living in a particular country. For instance, the GDP of US is $15 trillion. This is the sum total of incomes of 313 million Americans (at an average of $50,000 per person). This is one of the most simplest & intuitive measures to track the economy. If incomes go up, wellness go up. Thus, most government prioritize maximizing this measure. The annual growth in GDP is the most used metric to figure out if an economy is going up or going down. How is the GDP measured? The village of utopia has 6 cows (generating 100 liters of milk everyday), 100 acres of wheat field (generating 100 tons of Wheat everyyear), 100 acres of cotton fields, 1000 sets of clothing (at an average price of $10 each). Assuming that nothing else is produced in the village, the GDP of the village is: liters *365 = at $1/liter. Annual product: $ tons of Wheat at $500/ton. Annual product: $ sets of clothing at $10 each. Annual product: $10000 The total GDP of this village is: $ $50000+$10000 = $ (Note: We don't take the value of cotton produced here, as it will be accounted in the Textile production). When you have millions of people living a country, it can be hard to measure the GDP. Most often it takes a couple of years to fully know what happened on a particular year. Thus, there is a lot of guesswork involved in the process to make it more timely. There are 3 ways to measure GDP: 1 Measuring through Consumption: This is the total amount spent & invested by people. Since all money generated in the economy has to be either spent or invested, it indirectly measure economy. Given that governments have tax collectors all over the nation, it becomes relatively easy to measure how much people spend. Thus, this is one of the best ways to measure GDP. GDP = Spending by common people + Spending by government + Investments + Exports - Imports. In the short term, GDP can be increased by increasing government spending, leading to some leftist economist such as arguing for more government spending during recessions. 2 Measuring through Incomes: Add the wages, corporate profits, taxes, interests and rents of all labor+facilities. This measure can be delayed given the fact that businesses & people file taxes only the following year. If you subtract the tax component from this, you get the GDP measure: Total Factor Income.

2 3 Measuring through Production: Calculate the market value of all products & services produced in the economy. You need to make sure that you subtract the value of intermediate goods (such as the cotton from the fields). This is what we did in our basic utopia example. One of the hardest way to measure GDP as you need to track all products & services. If you add all the taxes & reduce subsidies, you get GDP at Producer Price. Due to the various guesswork involved, the 3 measurements could lead to different results: detailed of 3 1) The Expenditure Approach This method of determining GDP adds up the market value of all domestic expenditures made on inal goods and services in a single year, including consumption expenditures, investment expenditures, government expenditures, and net exports. Add all of the expenditures together and you determine GDP. 2) The Production Approach This method also called the Net Product or Value added method requires three stages of analysis. First gross value of output from all sectors is estimated. Then, intermediate consumption such as cost of materials, supplies and services used in production inal output is derived. Then gross output is reduced by intermediate consumption to develop net production. 3) The Income Approach This method of determining GDP is to add up all the income earned by households and irms in the year. The total expenditures on all of the inal goods and services are also income received as wages, proits, rents, and interest income. By adding together all of the wages, proits, rents, and interest income, you determine GDP: The three methods of measuring GDP should result in the same number, with some possible diference caused by statistical and rounding diferences. The credibility of data is always a signiicant concern in any form of research. An advantage of using the Expenditure Method is data integrity. The U.S. Bureau of Economic Analysis considers the source data for expenditure components to be more reliable than for either income or production components..

3 As such we will concentrate on the Expenditure Approach which is the most commonly discussed method of representing GNP particularly in non-academic examinations of economic activity. GDP as examined using the Expenditure Approach is reported as the sum of four components. The formula for determining GDP is: C + I + G + (X - M) = GDP C = Personal Consumption Expenditures I = Gross Private Fixed Investment G = Government Expenditures and Investment X = Net Exports M = Net Imports Before moving forward in our discussion, it should be noted, the income approach is gathering a growing following. This is true particularly among economic blogs, investment publications and cable news business programs due to its concentration on the importance of wages. An alternative method of calculating GNP using the Income Approach is RIPSAW. The mnemonic RIPSAW breaks down as follows: GDP = R + I + P + S + A + W R = rents I = interests P = proits SA = statistical adjustments (corporate income taxes, dividends, undistributed corporate proits W = wages

4 At this point, we could spend the next thousand words describing alternate means of computing GNP. While that might be beneicial in its attempt to be exhaustive, for our purposes what you need to remember is, in economics, there is rarely only one way to develop and analyze data Additionally, GDP is impacted by variables beyond economists control such as the economic health of our trade partners, monetary factors such as the value of the dollar, restrictions in state and local governments spending to the subjective views by consumers to business which inluence their consumption/investment choices. If all you remember from this essay is, jobs are created and lost based on the relative strength of the various components of GDP. Those components can and do luctuate from internal and external factors beyond the control of any our economic sages. Then you realize why economists are not Einstein and economics isn t physics. Please consider joining us if you the readers of PolicyMic wish to see this series continue as we next explore C = personal consumption expenditures, perhaps the most factor necessary to stimulate our economic recovery. zingfin.quora.com/what-does-gdp-mean-how-is-the-gross-domestic-pro... htp://

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