Economics GDP the Gross Domestic Product (GDP)

Economics

GDP

The Gross Domestic Product (GDP) is a measure of the economic activity in an economy. It is usually used to measure activity in a country, but may also be used for larger or smaller regions. In basic terms the GDP is the market value of all the goods and services that produced with the country or area where the measure is being applied. There are three different ways that GDP may be calculated, theoretically, each approach should give the same result. The three ways of calculating GDP are the product or output method, the income method or the expenditure method.

The product or output method is the most common method, may also be referred to as the value added method. GDP is calculated as the total market value of all of the products and services that are created with in the economy. The calculation is undertaken by estimating the total value of all domestic output, assessing the level of consumption which took place to produce those goods, such as the value of input materials, and deducting the consumption from the gross value. The income approach sees the GDP calculated by adding together the total of all incomes of those living in the area in that period. This includes salaries as self-employed earnings, corporate profits and interest payments. The last approach is the expenditure model, where the GDP is calculated by adding together all of the expenditure incurred by the individuals in that area in a period.

The calculation will result in the figure, which is a nominal GDP. That means that each year the figure will be given for the value that year. However, the value of money changes over the years, usually with inflation eroding the value of money. Therefore, it is possible there may be an apparent increase in GDP, which is the result of inflation rather than grow. Therefore, as well as calculating the nominal GDP, the real GDP may also be calculated. This is a calculation where an adjustment is made to account for inflation. Usually the adjustment is given in a currency chain to a particular year, to allow for easy comparison. Alternatively, the growth rate of the real GDP may be quoted.

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