Before moving on to the big picture of GDP to understand every mentioned point, let's first understand what GDP (Gross Domestic Product) actually In simple terms, GDP indicates the total value of all goods and services produced within a country during a specific period of time. The GDP is often used to measure the economic performance of a country or region. OR
"Another way, GDP (Gross Domestic Product) is the total value of all goods and services produced within a country's borders in a specific period (usually a year or a quarter)."
History of GDP
According to Wikipedia, Sir William Petty, an English economist, physician, scientist, and philosopher, developed the concept of GDP to measure the tax burden and argued that landlords were unfairly taxed during the conflicts between the Dutch and the English from 1652 to 1674. Charles Davenant, an English economist, Tory politician, and pamphleteer who represented the parliamentary constituencies of St Ives and Great Bedwyn, further developed this method in 1695.
In simple terms:
- The idea of measuring a country's total production started in the 17th-18th centuries.
- Developed the modern concept of GDP in the 1930s during the Great Depression.
- It became very important during World War II to measure war production.
- Today, GDP is the main tool governments and economists use to track economic health.
Basic Concepts of GDP
- Nominal GDP: GDP measured at current prices (includes inflation).
- Real GDP: GDP adjusted for inflation (shows true growth).
- GDP per capita: GDP divided by the population, showing average income per person.
- Growth rate: How much GDP increases or decreases compared to a previous period.
How to specify gross domestic product (GDP)?
GDP can be determined in three ways, including the following approaches:
- Production Approach (also known as Value Added Approach): The production approach assesses the value added at each stage of the production process.
- Income Approach: The income approach refers to the total primary incomes distributed by resident producer units.
- Expenditure Approach: The expenditure approach calculates the total of the final uses of goods and services as measured by purchasers' prices.
List of Factors Affecting GDP
Several things influence a country's GDP, such as:
- Consumer spending (people buying goods and services)
- Business investment (companies buying equipment, buildings, etc.)
- Government spending (roads, education, military, etc.)
- Net exports (exports minus imports)
- Natural resources (oil, minerals, fertile land)
- Technology and innovation (improve productivity)
- Labor force (more workers, more output)
Foundations of GDP (Gross Domestic Product)
GDP is built on key economic ideas:
- Value of production: Only final goods are counted (e.g., the price of a car, not the tires separately).
- Within borders: It only counts production inside the country, no matter who owns the company.
- During a set period: Usually quarterly or yearly, to measure growth over time.
- Legal goods and services: Only legal economic activities are counted.