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| Banking Awareness |
Gross Domestic
Product (GDP) – Basic Concept
What is GDP?
Gross Domestic
Product (GDP) is the market value of all final goods and services produced
within a country in a given period of time. GDP is the basic measure of the
country’s economic performance over a given period.
GDP is measured by
three basic approaches
1. Expenditure approach
2. Income approach
3. Value based approach
Types of GDP:
a. Real GDP
b. Nominal GDP
Real GDP is the
production of goods and services valued at constant prices whereas nominal GDP
is the production of goods and services valued at current prices.
But why we need to
measure both real and nominal GDP?
Now when the
total spending increases in a given period it points towards two happenings,
either the goods or services are sold at higher prices (i.e inflation has
increased) or the total output of goods and services have increased. While
studying economy, economist tries to separate these two effects. Hence they
measure the real GDP which allows them to find whether production of goods and
services has increased or decreased over the periods.
Components of GDP:
GDP is a
variable which depends upon four other variables. These variables form
components of GDP
GDP = C+I+G+NX
C= total consumption
I = gross investment
G= Government spending
NX= exports less imports
Consumption is
spending by households on goods and services. Here we do not include purchase
of new housing. Investment is spending on inventories. Equipments and purchase
of new housing Government spending includes spending on goods and services by
state and central government Net exports spending on the domestic products by
foreigners less spending on foreign products by locals.
