GDP is a chief indicator of a country’s economic performance. The value is measured during specific periods like annual or quarterly. Globally, it is used to gauge the financial status of a country.
In countries with middle or low-income, high Gross Domestic Product progress annually is crucial for satisfying the mounting developmental needs of their population.
Governmental policies are framed based on this indicator and investments too are made based on the value.
The various factors that are considered while assessing the GDP indicator include:
- Government expenditure
- Consumption by private and public entities
- Overseas trade balance, which is the value derived by subtracting imports from exports
- Infrastructure costs
- Private register additions
The imports and exports are a significant aspect of the assessment as the value surges when the exports exceed the imports. In such a situation, a trade surplus is present. If the converse happens wherein the imports exceed the exports, a trade deficit leading to reduced GDP occurs.
How to Assess
The calculation is completed in many ways. The method used differs based on the country. Some commonly used ways are:
The complete value, either market or monetary based, of the various services and goods made in a country is evaluated under this method. To prevent discrepancies in the value caused by variations in prices, the real GDP where the charges are kept constant is computed. So, as per this method:
GDP = GDP according to constant amount measurement – subsidies and taxes
The complete expenditure sustained by all units on services and goods within a country’s domestic boundaries is used for this evaluation process. Accordingly, the assessment is done as follows:
GDP = Consumption expenses (C) + Investment expenses (I) + Government expenses (G) + net exports (Exports – imports)
Based on Income
The full income made by manufacture-related factors, including capital and labor, lying inside a country’s geographical borders is calculated in this method. Accordingly, the value is derived as shown below:
GDP = The GDP at issue price + Taxes – grants
Different Types of Measurements
The various kinds of measurements include:
- Per Capita: The assessment of GDP for every single individual in a population is done in this method. This is a convenient method for comparing data from different countries.
- Nominal: In this method, the assessment is made at the present market values.
- Real: This amount is a value optimized for inflation. It signifies the rate of goods and their quantity in an economy for a year.
- Growth Rate: In this method, evaluation of the value during a quarter with that of the preceding quarter is done. The rate indicates the speed of economic growth in a country.
The nominal measurement alone is not sufficient to interpret whether an increase in numbers is triggered by price upsurge or production enlargement. The real measurement provides an adjusted output of a current year for rate levels sustained in reference or base year.
This helps in assessing the real progress of a country. Assessment in such a manner helps in spotting the difference in rates between the base year and the present year, which is termed as price deflator.
If there is a 6% increase in price when compared to the base year, the price deflator amount is 1.06. Nominal GDP divided by deflator provides the real value. The nominal values are higher when compared to the real values as inflation is usually indicated by a positive number.
In case, the difference is large, it indicates there is considerable depreciation or price rises in an economy. Real GDP denotes the actual financial performance of an economy and hence is right for knowing the financial performance for the long term.