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Gross Domestic Product (GDP)
Are you familiar with the term “Gross Domestic Product” or GDP? Do you know how GDP is measured and how it is used to help governments gain a valuable picture on the state of the economy? The following explains how GDP contributes to the overall picture of an economy and how to recognize a healthy economy from a languishing one.
A basic definition of what GDP measures is the total market value of all goods and services produced in a country in one year. “Gross” means that depreciation and other costs such as tax are not taken into account. Economists represent GDP using the following calculation: GDP = consumption + investment + (government spending) + (exports − imports). This takes into account a country's investment and expenditure, and compares how much it has spent on purchasing goods from other countries (importing) with how much it has earned from the sale of its own goods (exporting).
This may seem interesting, but how is GDP used in a practical sense? The main role of GDP is to help governments, investors and economic analysts interpret and measure economic growth. A strong economy will show an increase in GDP from year to year, while an economy in decline will have a decreasing GDP. GDP is of course linked to the law of supply and demand which governs the economy. When GDP starts to drop, it is a case of supply exceeding the demand for certain goods and services.
GDP figures are used every day to help the government make crucial decisions about how to spend money. It also helps international investors decide on where to place their money. Another way in which GDP is used is in the prediction of recessions and downturns. A falling GDP figure can be a sign that an economy is in trouble. Analysts will use GDP figures to trace market trends and to highlight areas in which growth could be boosted.
As you can see, a little figure can go a long way into helping bring about changes in the economy. Next time you purchase consumer goods and services, take a moment to think about how you are contributing to the GDP of your country.
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