GDP: a simple and comprehensive explanation
Whether you are into economy, or just watching the news or even casually scrolling through social media. You have likely encountered the abbreviation (GDP) a lot. But, what does it really mean? Why does everyone care about this (GDP)? What do we use it for and how do we measure it? We will answer all of these questions in simple terms to help you understand.
What is GDP?
(GDP) stands for Gross Domestic Product, and it is an economic key factor that determines the power of the economy. (GDP) reflects the power of a certain economy through representing the total monetary value of all the products, goods and services sold within the countries border. To simplify things, GDP tells us how much goods, products and services we sold within a country, not outside.
For example, we try to figure out how many products we made and sold like cars, food, phones. Or services such as legal consultation, lawyers, healthcare and subscriptions to magazines. We count the amount of all what we sold in a year and that is GDP.
Why is GDP important, and what do we use it for?
GDP is important for several reasons. Let us start with economic health. If the GDP of the country “X” is high or growing constantly, that means that the country’s economy is doing well, and that the economy of this country is strong enough. Moreover, higher GDP usually means better standards of life. Furthermore, GDP is a crucial factor for both government and investors to make their future plans. Higher GDP means more investment on infrastructure, education and health care form the government, and more investments from investors in local companies and business.
There is still another crucial use of GDP, that is comparing countries. The country with higher GDP is the one with the strongest, and the ones with the lowest GDP means that it has problems in its economy.
How do we calculate GDP?
When it comes to calculating GDP, there are three main approaches that we can use:
The Expenditure Approach: In this approach we calculate the money spent on goods and services by households, businesses, government and net exports (net exports is how much we export minus how much we import). Adding up all these figures gives us an idea about how much money the whole country made.
The Income Approach: Here we add up all the income earned in the economy (wages, profits, rents and taxes) minus subsidies that people or companies benefit from. This way we see how much money the whole economy made by looking at incomes instead of expenses.
The Production Approach: The production approach focuses on the production rather than income or expenses. However, instead of counting final products and services we make. We look at the whole production process that includes materials and added value (the added value is the value that the product has after it is done and ready to be used).
All in All, high GDP can indicate that the economy is strong with more goods and services being produced and potentially more wealth for the people. This can lead to better standards of living, more job opportunities, and improved infrastructure. Nonetheless, GDP is not the only factor or determiner that states whether an economy is doing well or not. Instead, we need to look at many various aspects to build a solid viewpoint regarding a certain economy.
