GDP

How do we measure a countrys GDP? GROSS domestic product (GDP) is one of the several measures of the size of the economy. It is defined as the market value of all final goods and services produced within the geographical boundaries of a country during a given period of time. It does not include the value of intermediate goods and eliminates the possibility of double counting. GDP does not include depreciation of capital stock. Depreciation deducted from GDP gives Net Domestic Product (NDP). What are the various methods of estimating GDP? The most common approach of measuring GDP is the expenditure method. GDP in this method is expressed as the sum of consumption expenditure, investment expenditure, government expenditure and net exports (quantum of imports deducted from quantum of exports). In this framework, general consumption spending is divided into private consumption, i.e. consumption spending of households on food, rent, medical expenses and so on, and government spending on salaries of public servants, purchase of weapons for the military, etc. It does not include any transfer payments such as unemployment benefits. Investment spending includes expenditure on productive physical capital, such as plant and machinery and changes in inventories. Net exports refers to the value of the goods and services a country produces for consumption overseas minus the value of goods and services that is produced abroad for domestic consumption. The second approach is the income approach. GDP in this approach is the sum of wages earned by workers for the work done, the profits earned from businesses and rent from land. The third approach is the value-added approach. In this approach, the GDP figure is arrived at by adding up the value added (value of final output minus the cost of intermediate goods) in various sectors of the economy, adding up the taxes on various products to this amount and subtracting the subsidies on products from the total. What is the difference between Gross Domestic Product and Gross National Product? Gross National Product (GNP) is the total value of all final goods and services produced by a countrys nationals. It is different from GDP in the sense that it is not confined to value of final goods and services produced within the geographical boundaries of a country, but also includes net factor income receipts from abroad as well. Net factor income receipts are arrived at by subtracting the payments to foreigners within the country from the income generated by domestic residents abroad. Factor incomes are measured as compensation to employees, corporate profits and net interest. What is Gross Fixed Capital Formation? Gross Fixed Capital Formation (GFCF) is the new additions by enterprises in the domestic economy in fixed assets during an accounting period less the disposals of fixed assets during the same period plus additions of non-produced assets ( for instance, discoveries of mineral deposits). In this context, fixed capital needs to be distinguished from circulating capital. Fixed capital is defined as that category of capital that is not used in the production of goods. This includes plant, machinery, buildings etc. Circulating capital, according to classical economists such as Karl Marx and David Ricardo, is that type of capital that is used in production of goods and services. This includes raw materials, intermediate goods etc. What are the drawbacks of GDP estimates? GDP does not take into account the black market where the money spent is not registered resulting in inaccurate or abnormally low GDP figures. For example, in countries with major business transactions occurring informally, portions of local economy are not easily registered. GDP ignores the environment, subsistence production and domestic work. It is estimated that if an attempt to factor in unpaid work were made, then it would in part, undo the injustices of unpaid labour. Dated 23/10/2006