An economically strong country can ensure higher real wages, higher employment, and higher spending. Increasing GDP is a sign of an economically strong country.
In this article, I have shared a research-based article about GDP. We will do a good explanation of The Four types of GDP.
THE TOPIC YOU WILL FIND IN THIS ARTICLE:
1 . What is Gross Domestic Product (GDP) in 60 seconds?
2 . What are the four Types of GDP (Gross Domestic Product )
3 . Calculation of Gross Domestic Product (GDP): Here is how?
4 . Why is GDP used For?
5 . Which country has the highest GDP in 2022?
BONUS: WHAT ABOUT COMPARING THE GDPS OF TWO COUNTRIES?
Keywords: GDP, GNP, nominal GDP, actual GDP, use of GDP, compare the GDP
Table of Contents
1 . What is GDP (Gross Domestic Product) in 60 seconds?
In this part of the article, I will talk about the “general idea of GDP in 60 seconds “.
GDP is considered a financial measure of the market value of all the final products and services.
In a certain period, these final goods and services have to be produced and sold by the country. It also counts all of the output generated within the borders of a country.
In 1962 a famous economist, statistics, and mathematics Simon Kuznets came up with the idea of GDP. He developed an outstanding way to measure the GNP of the US. From here we got the evolution process of GDP. So, Simon Kuznets is the creator of GDP.
GDP includes goods and services that can be sold in the market as well as nonmarketable goods. For example, defense or education services that are given by the country’s government.
Let’s have a clear idea of GDP with an example: if you bake a piece of bread for your family, it will not be counted as GDP. But if the baker produces bread for a customer, this would contribute to GDP.
GNP, or gross national product, is an alternative concept to GDP. GNP is very much connected with GDP. GNP on the other hand counts all the output of the residents of a country. For example, a Chinese company’s U.S. Output from this factory would be included in U.S. GDP, but in China’s GNP.
2 . Type of Gross Domestic Product (GDP)
In this part of the article, I will talk about the “Type of Gross Domestic Product (GDP)”.
GDP is a huge concept. It ends the confusion about the country’s economic growth on many levels. An economically and financially developed country is considered the provider of all resources and services people want from the country,
There are four different types of GDP,
1 . Real GDP:
Real GDP is a macroeconomic metric. Real Gross Domestic Product includes inflation and quantifies the worth of the products and services generated by a country over a given period. Real GDP is calculated using prices from the base year. Real GDP is referred to as GDP at constant prices, GDP adjusted for inflation, or GDP at constant dollars.
The total economic output of a nation can be calculated using a real GDP, and price changes can be taken into account. Another sort of GDP that is almost as measurable as real GDP is nominal GDP. Nominal GDP is considered the current dollar GDP.
How to calculate the real GDP:
R = Nominal GDP/ Deflator
For example, if the nominal GDP was $23.342 trillion. The deflator was 1.2343. The real GDP will be,
R = $23.342 trillion / 1.2343 = $18.911 trillion
2 . Nominal GDP:
Nominal GDP or Nominal gross domestic product (GDP) is the 2nd important type of GDP. Nominal GDP is the GDP given in current prices value. Nominal GDP is calculated without adjustment for inflation.
This GDP measures the level of economic output in a country. Only current prices are used to calculate nominal GDP. The nominal GDP will appear higher if all price increases for goods and services occur more or less simultaneously. Inflation is the term used to describe how these prices increase roughly in tandem.
Real GDP, on the other hand, uses a GDP deflator to account for inflation whereas nominal GDP represents inflation. Generally speaking, inflation is a positive quantity. Because of this, a nation’s nominal GDP typically exceeds its real GDP.
Calculate the nominal Gross Domestic Product:
GDP = C + I + G + (X – I),
Here,
C = Consumer Spending
The entire amount that people spent on goods and services for their use is known as consumer spending.
I = The Business Investment.
The amount of money spent on new capital upgrades or business expansions is included in the business investment.
G = Government Spending
The amount of government expenditure in the economy, especially on new infrastructure, is included in government spending.
(X – I) = This is Net Exports.
Net exports are the difference between a country’s revenue from exporting and its cost of imports.
3 . Actual GDP: Actual GDP is regarded as the input’s value over a specific period. The specific period could be a quarter or a year. A country’s measured output at any time can be represented by its actual GDP. Experts call actual GDP “real GDP”.
Why is real GDP essential, though? Economists can determine a country’s economic growth or decline by looking at its real GDP. Real GDP is calculated as the total of all goods’ current-year quantities and base-year prices.
Real GDP= Nominal GDP/ GDP deflator
4 . Potential GDP:
The economy’s sustainable output, where inflationary pressure does not rise or fall with the intensity of resource use, is measured by the potential GDP. It is the greatest GDP that can be produced over time at a given rate of resource consumption in the economy.
Because monetary officials base their decisions on the difference between actual and potential GDP, potential GDP is significant. Every economic system has some inherent limitations brought about by its workforce, technological capabilities, resource availability, and other considerations.
Potential GDP calculation:
The growth rate in potential gross domestic product= Long term growth rate of labor force+ long-term growth rate in labor productivity.
3 . Calculation of Gross Domestic Product (GDP): Here is how?
Now in this part let’s discuss “how we can calculate the GDP”.
There are three ways to calculate GDP
1 . Production approach: The process is simple. the sum of the “value-added” at each stage of the production. Value-added is the total sales minus the value of intermediate inputs.
2 . Expenditure approach: In this process, the result is the aggregate of purchases made by final users.
3 . Income approach: The incomes produced by production subjects must be added up in the Income method.
GDP Calculation Formula:
Use the formula for calculating GDP with the expenditure approach:
GDP = private consumption + gross private investment + government investment + government spending + (exports – imports).
GDP = C + I + G + (X – M)
Update of GDP according to the world bank
4 . Why is GDP used For?
In the 4th part of the article, I will talk about the use of GDP.
Gross domestic product, or GDP, is a metric used to determine for a certain nation over a specific period the amount of the total dollar worth of all services and products generated.
It is used to assess a nation’s overall economic performance and to evaluate how well other nations’ economies are performing in comparison. In addition to being used to evaluate the overall health and stability of an economy, GDP is also used to monitor the growth of a nation’s economy.
GDP helps us to identify if the economy is expanding due to the production of more goods and services or contracting as a reason for less output. GDP growth is a positive sign for a country. GDP tells about the health of the economy of the country. But the sad reality is GDP does not ensure that the country is in good health or that the people are leading a good life.
The GDP provides data on the size of the economy. GDP provides information on an economy’s performance in a given year.
5 . Which country has the highest GDP in 2022?
Now let’s talk about different countries that have a good GDP score.
As always the US with $20.89 trillion has the highest GDP in 2022. Then talking about China we have nearly $14.72 trillion worth of GDP, and Japan has $5.06 trillion.
Germany has $3.85 trillion and the United Kingdom has $2.67 trillion worth of GDP. These are the top 5 countries that score high in GDP.
China ranked 2nd in the highest GDP rate in 2022. This is a piece of good news for Asia. Which also makes China a strong country in production, economy, and business.
A country’s GDP includes the calculation of all private and public consumption, paid-in construction costs, and investments. government outlays private inventory expansions and the global trade balance. Among them, the foreign balance of trade is considered noteworthy. You can calculate GDP in two different ways,
1 . Nominal basis
2 . Real basis,
BONUS: WHAT ABOUT COMPARING THE GDPS OF TWO COUNTRIES?
Finally, in bonus point, I will talk about what to keep in mind when we compare the GDP of two different countries”
Every country has different parameters with which they calculate their economy. Among them, one of the hottest topics is GDP comparison. GDP includes many important things for economic justification. For example, GDP includes food products to vehicles, machinery, textiles, and whatnot.
GDP is also calculated based on different services. For example, health care, education, and whatnot. It is important to take into consideration several variables when comparing the GDP of two nations. These variables can include population size, the nature of the economy, and the degree of development.
Additionally, you should also consider other economic indicators, such as inflation rates, employment rates, and government debt levels, as well as the relative purchasing power of each country’s currency. Comparing the GDP of two countries can provide an important insight into their relative economic performance, but it is important to remember that GDP alone is not a perfect measure of a country’s overall economic health.
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