To give a definition to such a concept as GDP, it is absolutely not necessary to use a lot of complicated terms and formulations. For this purpose, simple, understandable words are quite suitable. So, let's try to determine what GDP is and why this indicator is needed.
First of all, it should be noted that the term GDP or gross domestic product of a country is used to determine the rate of economic development of any state.
In simple terms, GDP is the total value of goods, works and services that were produced and provided in the territory of one country for a year.
This indicator was first calculated in the 30s of the XX century by the economist Simon Kuznets. Later, the specialist received the Nobel Prize.
Today, in the field of economics, two important indicators are used: GDP and GNP. The concepts differ from each other, although they are aimed at determining the economic indicators of the state. When calculating the gross domestic product, financial indicators are taken into account, which do not depend on the nationality of the enterprises involved in the production of products. The most important thing is that the enterprise is located on the territory of the state.
To calculate the domestic national product (GNP), only the products of those production facilities that are considered national are taken into account.
What is GDP?
As we have already noted, the term has a very simple definition - it is the cost of everything that is produced in the state. The calculation of the indicator has a multi-level nature and special services are involved in its implementation. It is generally accepted that GDP is expressed in US dollars, however, today, the following options are used:
- national currency of the country;
- monetary unit of any state, in accordance with the exchange rate.
The dollar is used to perform comparisons of the GDP of different countries in order to compile ratings and assess the current economic situation.
What types of GDP are there?
To get a more complete picture of the indicator, it is worth getting acquainted with its types. So, let's consider this issue in more detail and note that GDP can be:
- real;
- nominal.
Real GDP is an indicator that is used to account for the growth of production without using its financial side. As a rule, this parameter is expressed in prices of the year that was taken as the main one in the calculations. For example, to calculate the indicator for the last year, Rosstat used the data on prices for 2011 as a basis.
The advantage of the indicator is that it allows you to determine the increase in the country's trade turnover. Real GDP does not depend on changes in exchange rates and other economic parameters. It is this indicator that draws conclusions about the current state of the economy in the country.
For example, real GDP will make it possible to quickly understand if there is a crisis in the country and how difficult the economic situation has already developed. For countries with stable economies, real and nominal GDP are the same.
The nominal indicator is GDP calculated at current prices. The cost of certain goods is determined at the time of collection and is subsequently used for calculations. When a country experiences a high inflation rate, GDP may grow, however, such a reaction will be formal and the reason for it will be a real decline in production capacity.
In fact, nominal GDP serves to reflect the rise or fall in the value of goods and services within the country, without touching the dynamics of economic development as a whole. Nominal GDP serves as a kind of tool for economists to draw certain conclusions and make forecasts.
As an example, we can cite the situation of changing the indicator. If, with a constant increase in prices, the level of demand begins to fall, then the nominal GDP will significantly decrease.
What are “GDP per capita” and “GDP at PPP”?
Economists often refer to a term like “GDP per capita”. This indicator is used to identify important indicators of the state or in a specific region. Calculating this indicator is very simple using a simple formula:
GDP per capita = total GDP / per number of citizens living in the country.
This parameter is also used to compare economic performance in different countries. In fact, this indicator cannot be considered absolute and accurate, since the data used in the calculation change periodically and are not always real.
PPP is another term that needs to be deciphered. Under this concept, purchasing power parity is encrypted. This indicator is used to compare data in different countries and in different monetary units. In other words, PPP GDP is the ability of a citizen of one state to purchase goods from another for his income.
When carrying out international comparisons, the UN compares about 700 basic goods, 250 investment objects, 15 projects under construction.
Methods for calculating GDP
The classic formula for calculating GDP is quite simple:
GDP = Gross Value Added + Taxes on Products and Imports - Subsidies on products and imports, however, different formulas may apply when using certain methods of calculation. There are several methods for calculating this indicator. Let's note the most famous and simple ones:
- Production method or value added. To calculate the GDP, the value added indicator and the market assessment of production in the territory of the state are taken as the basis. The method is production
- Distribution methodology or income. To calculate GDP according to this method, such types of income are used as: all paid wages and bonuses to the population, profit from land lease, interest on borrowed funds. Direct taxes and salaries of civil servants are not taken into account.
- End-use or cost method. To calculate the indicator, it is necessary to use the following types of expenses: consumer, government, investment, net exports.
For this method, a special calculation formula is provided:
С - personal consumption expenses;
I - gross investment;
G - government procurement of goods and services;
Xn is pure export.
Each method has its own characteristics and subtleties. In our country, all three calculation methods are used, however, the most preference is given to the distribution method.
GDP in the Russian Federation
Annually, the President of the Russian Federation V. Putin convenes a press conference, where he reports on the current indicators of the country's GDP. Last year, such a meeting took place at the end of December, where the President said that in 2016 there was a drop in GDP, however, it was within the norm and amounted to 0.5-0.6%. If we compare the indicators of 2015, when the GDP was 3.7%, it can be noted that the decline was insignificant. Moreover, in November last year, there was a slight increase in the indicator, which could be the beginning of an increase in the pace of the economy in the state.
D. Medvedev also expressed his opinion on this issue. The Prime Minister confirmed that the country has gone through one of the most difficult periods in its history and today we can say that the states have adapted to the fall in oil and gas prices. According to Medvedev, the economic downturn was stopped and the GDP indicators were:
- nominal GDP - US $ 1,267 billion;
- PPP - 3,745 billion US dollars.
As for the level of GDP in 2017, it is worth noting here that already in the first months of the new year, GDP growth was noted, and by the end of the year it amounted to 1.1%.
What is the significance of the GDP indicator for the state?
As we have already noted, GDP is an indicator that includes the total cost of all products, goods and services that the state produced in a year. This parameter is of great importance for each country, since it allows one to determine the trends and speed of economic development of the state. GDP is characterized by the following features:
- the indicator is measured in dollars for further comparison;
- within the country, data are calculated in national currency;
- the indicator is recalculated annually;
- GDP is formed not only at the expense of state, but also at the expense of private revenues;
- the indicator fully reflects the stage of the country's economic development.
For GDP to be calculated as accurately as possible, it is not enough to take basic general figures and make calculations. To get a more complete picture of the development of the state, to determine the GDP, namely, to understand which industries are the most profitable, it is worth checking such indicators.
For example, in Russia, the most efficient and profitable industries are those related to the sale of oil and gas, respectively, the income received from this source plays a special role in the formation of GDP.
Conclusion
GDP is a very simple concept that can be fully described in simple words and phrases, without using complex terms and concepts. Our article was written so that even people without economic education could get the desired information without delving into complex formulations and calculations.
The paper provides simple definitions of the basic concepts and describes the main methods for calculating GDP, which allow you to get an idea of the most important economic indicator of any state.
VVP is often mentioned in the media. This concept is used by officials of different levels when they comment on the level of development of the state's economy for a certain period. Let's see what GDP is and what impact this indicator has on the life of an ordinary citizen.
What is GDP
GDP stands for “gross domestic product”. In simple words, GDP is the value of goods, products and services in aggregate that were produced in the state in one year. GDP is an indicator of the scale and success of the economy of a state.
Economists study a country's GDP and draw conclusions about its economic prosperity. When this indicator shows an increase, it means that the country has begun to produce more various goods and provide services.
GDP growth signals that the country's economy is on the rise, since the operating factories, factories, the mining industry, the service sector deduct taxes to the treasury, which means that the country as a whole is becoming richer.
The decline in GDP signals to investors that the economy is in stagnation, and producers' incomes have declined.
The size of GDP does not depend on the size of the country, but only on the potential and scale of its economy. For example, this indicator in the smallest European country Luxembourg (area 2,586 m2, population 576,249) is $ 103,199 per capita, that is, every Luxembourger has such an income per year.
And what about this indicator in Kazakhstan? According to the World Bank, the country earned $ 133.65 billion in 2016, that is, the income of each Kazakhstani was $ 7453. In terms of the level of economic development, Kazakhstan is in 54th place in the world ranking, but in terms of income of the population - in 74th.
How does GDP affect the salaries of citizens? The more goods are produced in the country, the more deductions to the budget. The state treasury pays salaries to doctors, teachers, makes social payments to pensioners, etc. If this economic indicator is high, then salaries also increase.
However, there is one "but". This is inflation. GDP is often higher than last year, and people have become poorer because inflation has risen significantly. For example, a family of three earned $ 10,000 in 2015, and $ 10,500 in 2016. It seems that their income has increased. But in 2016 inflation was 7.4%. That is, income increased by 5%, and due to inflation, the family became poorer by 2.4%.
The Minister of Economy of Kazakhstan Timur Suleimenov has identified priority sectors, thanks to which the country's GDP will increase in 2018:
- oil production;
- transit of oil products;
- manufacturing industry;
- infrastructure development.
According to preliminary estimates, this figure, compared to 2017, should grow by 3.1% in 2018.
What is GNP and how does it differ from GDP
GNP is the gross national product. In other words, it is the value of the national economy, which develops both within the country and abroad. That is, this is the cost of products and services that are produced in the country and in the territories of other states. And GDP is the market value of everything that was produced exclusively within the country.
GNP includes:
- services and products produced abroad, but by domestic producers;
- financial transactions (businessmen buy stocks, bonds, etc.);
- displaced funds (transfers, transfer of ownership, pensions, scholarships).
It turns out that the GNP indicator includes the profit that was transferred to the national treasury from other countries, from investments in the economy of other countries, the wages of those citizens who work abroad.
If GDP indicates the well-being of citizens, then GNP is a statistical (monetary) indicator by which one can judge the dynamics of the national economy.
GDP is the market value of all goods produced in a certain time period in the territory of a particular price. This indicator is not affected by the presence in the state of enterprises owned by foreign companies. If we say what GDP is in simple words, it is the sum of all goods and services that were produced or provided in the country for a limited period of time (year, half a year). More often, when calculating this indicator, data obtained over 12 months are used. However, for various purposes, the time period can be reduced to one month.
Deciphering the concept
GDP stands for Gross Domestic Product. This amount takes into account the production of all goods released in the country, including those that were sent for export and for inventory.
Example: during the year, 100 thousand tons of grain were produced throughout the country. Of these, 50 thousand tons went for domestic consumption, 10 thousand - for export, and the rest went to storage. But the indicator of the gross product will include exactly 100 thousand tons of grain.
The decoding of the term indicates what the GDP consists of:
- Gross. The word means a combination of one or many denominators (goods, services).
- Interior. GDP is an indicator that is calculated only for a specific country or group of countries.
For certain purposes, a different definition of the term in question is sometimes used. Gross Domestic Product is the market value of goods and services produced on the planet. In this case, GDP is made up of production indicators achieved as a result of their activities by all enterprises in the world.
Gross domestic product is calculated in national or foreign currencies. The latter are used when the need arises, for example, to bring the dynamics of changes in this indicator in comparison with other countries.
It is important to note that the gross domestic product is often defined as the level of the nation's well-being. This approach is wrong.
Types of GDP
In other words, GDP is an indicator that measures the results of production activities. It allows experts to assess the efficiency of enterprises in the country for a selected time period.
To understand the essence of the concept, it is necessary to establish what the GDP includes. This indicator measures only the amount of the final product produced in the country, which means the following: any product that is subsequently used for the manufacture of another product is not part of the term in question.
A country's GDP should be distinguished from GNP. The decoding of the latter sounds like the gross national product. This definition provides the following: GNP takes into account the indicators of all enterprises resident in the country, located both within a separate state and abroad.
For example, Lukoil has oil rigs in Russia and Iraq. GNP takes into account the total production that a company has shown over a certain period of time. However, only the oil that was produced in our country is included in Russia's GDP.
There are two types of gross domestic product:
- nominal;
- real.
When calculating nominal economic indicators, the inflation rate is not taken into account. So, if one family during the year was able to earn a total of 100 thousand rubles, and after a year - 120 thousand rubles, then the GDP of this cell of society for the specified period increased by 20 thousand rubles.
In reality, the situation looks somewhat different. Family income declined during the year due to rising inflation. That is, in this case, GDP should be defined as the difference between the first and the last indicators.
Let us assume that the growth of inflation for the indicated period was 10%. The calculation of the real GDP of this family is carried out as follows: nominal GDP (120/100 * 100%) - (inflation rate). This means that during the specified period, a positive dynamics of the real gross product was achieved for the cell under consideration (12% -10% = 2%).
The above example allows us to understand what GDP is in economics in simple terms. In addition, GDP is also calculated at purchasing power parity. Unlike usual gross indicators, this one includes the number of inhabitants of a given country. To calculate GDP at purchasing power parity, it is necessary to take the total amount of goods and services produced and divide by the number of people living in the country.
The last indicator shows the current level of well-being of the population. That is, it demonstrates the average paying capacity of all residents.
How GDP is calculated
The dynamics of the gross domestic product is assessed by the following indicators:
- added value;
- income;
- expenses.
The methodology for calculating GDP at added value is often referred to as production. This method allows you to get a number that takes into account the difference between the income that the organization received during a certain period, and the costs incurred in connection with the costs of production. As in the case with other types of GDP, this calculation methodology takes into account only final goods.
The second method involves performing several operations. To calculate GDP, you must first add together the indicators of national income and depreciation. Further, the following are deducted from the received amount:
- indirect taxes;
- government subsidies;
- net factor income.
The methodology for calculating GDP by expenditure takes into account the following elements:
- Final consumption amount. This indicator takes into account the amount of all costs of residents of the country associated with the purchase of goods or services.
- Investment capital. It means a certain amount spent on the modernization of production, advanced training of employees and other investments designed to increase the level of profitability.
In addition, the calculation of GDP by expenditure takes into account the amount of government spending:
- remuneration of employees of budgetary organizations;
- defense spending and more.
And the last thing that this methodology takes into account is the indicator of net exports. It represents the difference between the volume of goods (services) sent abroad and imported products.
In addition to these types of GDP, the following are used in economic practice:
- Net GDP- it is a gross product consisting of all goods and services produced, but after deducting depreciation costs.
- Potential GDP- it is calculated taking into account full employment of the population and shows potential economic opportunities.
Gross Domestic Product is an indicator showing the current state of a country's economy. Its growth shows that the number of enterprises in the state is increasing, as well as the volume of production.
The gross domestic product is one of the most important indicators of the development of any state. Its volume shows the size of the national economy, and its structure shows the established technological order. Gross domestic product, methods for calculating the gross product, indicators of various countries, as well as other approaches to measuring economic progress will be discussed below.
Definition
Gross Domestic Product (GDP) is a generalized indicator of the level of production, which is equal to the sum of the values added by all residents, institutional units involved in economic activity (plus any taxes and minus subsidies). This is the definition given by the Organization for Economic Co-operation and Development (OECD).
Overview of the concept
The dynamics of GDP is often used to assess the economy of an entire country or a particular region. The internal structure of this indicator is characterized by the relative contribution of the sectors of agriculture, industry and services. It can be used in a similar way because gross domestic product is not the sum of sales, but the value added produced by resident firms. The latter indicator is calculated as the difference between the purchase and sale prices of the manufactured goods. For example, a firm purchases steel and increases its value by making an automobile. This avoids double counting. Thus, the GDP formula does not take into account intermediate consumption, so the overall indicator does not increase if an individual firm decreases the use of materials and resources while the volume of output remains unchanged.
The dynamics of GDP characterizes the growth of the economy from year to year (recently and in different quarters). The graph shows the successes and failures of policy and determines whether the national economy is in recession.
Indicator measurement history
The English economist William Petty came up with the basic concept of GDP to protect landowners from dishonest taxation during the war with the Dutch from 1652 to 1674. Charles Davenant developed this method. The modern concept of calculating GDP was first developed by Semyon Kuznets (after emigration he changed his name to Simon Smith) in 1934. He used this figure in a report to the American Congress. Even then, the blacksmith warned about restrictions on the use of GDP as an indicator of the nation's well-being. Until the 80s of the last century, GNP was used more often. British economist Angus Maddinson calculated GDP values up to 1830 and even earlier.
Gross Domestic Product: Methods for Calculating Gross Product
Let's consider a modern approach to calculating this indicator. Gross Domestic Product is the result of extensive statistical analysis and a whole set of calculations based on the base of the original data, collected with the conceptual in mind. GDP can be defined in three ways. If all the necessary data is collected correctly, then all calculation methods should give the same result. Among them:
- Manufacturing (value added).
- Expensive.
- Profitable.
Manufacturing method
If you need a simple and effective example of how to calculate gross domestic product, economics as a science has long since developed it. This is the so-called production method, which characterizes GDP as the sum of the output of all enterprises. It fully complies with the definition given by the OECD. GDP is equal to the total cost of production minus intermediate consumption. Data is collected in two ways:
Gross Product Cost
This method is based on the fact that every product must be purchased by someone. Thus, the value of GDP is equal to the total cost of acquiring all the things produced. It will be equal to the sum of three indicators, among them:
- The amount of personal consumption expenditures.
- Gross investment.
- The volume of government purchases.
- Net export.
Income calculation method
The GDP formula in this case is based on the principle that the sum of the remuneration of all producers is the desired indicator. All income according to SNA-93 is divided into five categories:
- Salary, bonuses and allowances.
- Corporate profits.
- Rent for the land.
- Interest for the use of capital.
- Unincorporated business income.
International standards and adjustment of calculations
The measurement of gross domestic product is carried out in accordance with the 1993 System of National Accounts. This international calculation was developed by representatives of the IMF, EU, OECD, UN and World Bank. The new edition of the standard is abbreviated as SNA-93 to distinguish it from the previous one, developed in 1968 (SNA-68). Within each country, GDP is usually measured by the national statistical office, as private organizations do not have access to the required data.
Domestic versus national product
GDP is often compared to GNP (GNI). The difference is that gross domestic product accounts for goods according to their place of production, and national income accounts for property rights. Thus, in a global context, GDP is equal to GNP. The gross domestic product reflects the aggregate value of goods produced domestically, and the national product - by domestic firms, regardless of their location. A country's GNP is equal to GDP plus revenues from abroad and minus payments abroad.
Comparison of indicators and purchasing power parity
The values of GDP in different countries, even expressed in one currency, do not always really reflect their level of economic well-being. For a more correct comparison, not the official rate is used, but purchasing power parity. The ranking of countries can vary dramatically depending on which method was used. The nominal gross domestic product is calculated at the official rate, while the real one takes into account not the rise in prices, but production. Their ratio is called the GDP deflator.
Gross Domestic Product of Russia
Nominal GDP in the Russian Federation as of April 2015 amounted to USD 1.175 trillion, at purchasing power parity - 3.458. This puts Russia in tenth and sixth place, respectively, in the global ranking. The sharp decline in oil prices and economic sanctions led to a 4.6% drop in the country's GDP as of the second quarter of 2015. The structure of gross product by sector is as follows:
- Agriculture - 4%.
- Industry - 36.6%.
- Service sector - 59.7%.
Shower indicators and living standards
GDP is an aggregate value that does not take into account the size of the population. In order to take it into account, they came up with a per capita indicator. It is found by dividing GDP by the number of population in the calculation period. This indicator is often used as an indicator of the standard of living in the country. It is believed that all citizens will benefit from increased production in their country, as this will lead to increased consumer opportunities for people, which in turn will positively affect their sense of well-being. GDP per capita is not a measure of personal income. In most cases, these values do not even depend on each other.
The biggest advantage of using GDP per capita as an indicator of a country's living standards is that it is measured frequently, almost everywhere, and in a similar manner. Its main disadvantage is that it does not take into account:
- Distribution of national wealth (inequality between different demographic groups).
- Non-market transactions (e.g. volunteer work).
- The shadow sector of the economy.
- Enterprise asset value.
- Non-monetary economy (barter).
- Natural economy.
- Improving quality and developing new products.
- A set of manufactured products.
- Growth sustainability.
- The difference in purchasing power parity between nations and in different periods (although the indicator of real GDP per capita was invented to eliminate this deficiency).
- Negative externalities associated with the growth of the gross product.
Limitations and criticism of the approach
The economist who first developed the complete concept of GDP - Semyon Kuznets - noted in his report to the American Congress in 1934 in the section entitled "The Use and Limitations of the Measurement of National Income": "The valuable ability of human thinking to simplify complex situations becomes dangerous when it is not controlled by clear criteria. ". The scientist warned against taking the accuracy of the new metric too seriously. According to Kuznets, the measurement of GDP largely depends on which of the social groups is engaged in this. Gross domestic income does not reflect the economic well-being of citizens. In order to actually measure progress, it is also necessary to take into account the distribution of income within the country. Moreover, the new indicator does not take into account the downside of making money, that is, the efforts that people made, worsening their life satisfaction. In 1962, Semyon Kuznets noted that it is necessary to understand the differences between quantitative and qualitative growth, costs and results, short and long term.
Frank Shostak, a spokesman for the Austrian School of Economics, expressed an even more critical view of GDP. He stated that this indicator is just an abstraction, which has nothing to do with the real world and therefore has no value for analyzing the development of a country.
Other approaches to measuring economic progress
The volume of gross domestic product is not the only indicator that characterizes the economy of a particular country. Even Semyon Kuznets warned about the danger of measuring economic progress only with his help. Other indicators with a similar function include:
- Human Development Index. Until 2009, it took into account the life expectancy of the population, its level of education and the country's GDP. Gross national income (GNI) is now used instead of the latter.
- A genuine indicator of progress or an index of sustainable economic well-being. This indicator takes into account the statistics needed to calculate GDP, and also adds value, such as volunteer work, and subtracts crime and pollution.
- European indicator of quality of life. It was first published in 2005 and assesses the subjective satisfaction with the living conditions of citizens of a particular country.
- International Happiness Index. The Bhutan Center examines a range of subjective and objective indicators to determine the development of a nation. They take into account living standards, the education and health care system, the state of the environment, the use of time, management features, and the psychological well-being of citizens.
- Happy Planet Index. Calculated from 2006 and takes into account subjective satisfaction with existence and life expectancy. The environmental impact is measured using an ecological footprint indicator.
Other approaches to measuring economic progress include the OECD Better Life Indicator, general welfare indicators, the Google Trends index of future benchmarks, and governance and social development assessments.
GDP level or gross domestic product(eng. Gross Domestic Product, GDP) Is an indicator reflecting the market value of all final services and goods produced in the year of interest in all sectors of the economy on the territory of the selected state (for consumption, accumulation and export). At the same time, the level of GDP does not take into account the nationality of production factors (natural, raw materials, labor resources, etc.).
The rate of change in GDP is the main tool for assessing the state's economy. GDP can be expressed both in the national currency of a country and, for comparison purposes, in US dollars.
What do "gross" and "internal" mean?
“Gross” means that all production is estimated with the help of GDP, regardless of its goals. Production can be directed to immediate consumption, investment in new fixed assets, or to replace impaired fixed assets. “Domestic” means that the GDP is used to estimate production within the territory of one country.
Types of GDP
There are several types of GDP:
- Nominal GDP
Nominal GDP is calculated at current prices and does not include inflation.
- Real GDP
This is nominal GDP adjusted for inflation.
- GDP per capita purchasing power parity
GDP per capita (simplified) = the value of all goods and services produced by the inhabitants of the country, expressed in US dollars / the total number of these inhabitants. The PPP GDP value better reflects the state of affairs in the state than the nominal GDP.
What is GDP made of?
The structure of the GDP of any country consists of goods with tangible and intangible expression (services) produced in this country for the year for the final consumer. This includes the total cost of produced cars or machines, and the cost of baked bread, rolls and cakes, and the cost of lectures given at universities and cured patients in clinics.
How is it calculated?
There are many ways to measure GDP. Today, two basic principles of counting are used:
- profitable - the summation of the cost of manufactured products;
- expendable - summing up the funds spent over the year.
If calculated correctly, both amounts should be approximately equal.
Why does a Forex trader need a GDP level?
Currency analysts operate not with the absolute value of the level of GDP, but with the rate of its changes, which is expressed as a percentage in relation to the previous quarter or year. GDP growth testifies to the stability of the economy and, as a consequence, implies an increase in the exchange rate of the national currency. Conversely, a decline in GDP indicates problems in the economy and causes a depreciation of the national currency.
