Gross Domestic Product
Gross Domestic Product is the total amount of goods and services produced in the national territory by foreign and domestic factors at market prices.
It is the total sum of goods and services produced in the national territory regardless of whether they are produced by national and foreign companies during a year, expressed in monetary terms at market prices. It’s a macroeconomic indicator that gives information on the productivity of a country during a year.
The gross domestic product is an indication of the efficiency of the productive sector of a country, which affects its growth and economic development. It’s a very important variable to understand the economic growth that a country has in comparison to another country or another period of time.
Contents
General price index
The general price index tells how prices have moved, if they have decreased or increased during a year and provides information on the purchasing power of society, this is one of the indicators of inflationary processes.
Inflation is the loss of purchasing power of people, it supposes the rise of the price index. This affects people with fewer resources to a greater extent because it puts them at risk of not even being able to satisfy their basic needs.
Types and ways to measure GDP
The two types and ways of measuring GDP are:
Real Gross Domestic Product/GDP (at constant prices)
Real GDP is the measure done by eliminating inflation or, in other words, at current prices, deflated in relation to a base year. GDP at real or constant prices is used to obtain more accurate data on real GDP growth because this occurs when there is an increase in the quantity and goods and services produced during a year.
Nominal Gross Domestic Product/GDP (at current prices)
Nominal GDP is calculated at market prices for the year under review, if the quantities produced are similar to the previous year and the prices are those that increased relative to the previous figures.
If this happens, there will be a nominal increase in GDP, which is negative because it means that people can buy fewer goods and services. If this type of increase continues to occur, then the economy will be in a process of inflation.
How to calculate the Gross Domestic Product
The formula is: GDP = C + I + G + (X – M)
Which means:
GDP = private consumption + gross private investment + government investment + government spending + (exports – imports)
See also