GDP is an indicator of what?

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

Today, in the media, one can increasingly hear the opinion that GDP is an indicator that, in fact, means nothing. How is it so? After all, all countries necessarily calculate it? Doesn't GDP growth mean an automatic improvement in the welfare of the nation? In order to understand this issue, let's find out how this indicator is calculated.

To begin with, it should be mentioned that GDP is the total value of all goods produced and services rendered by residents and non-residents of a given country in its territory for a certain period of time (most often a year). In order to account for inflation, economists may consider the final cost in terms of both real prices and base prices. There are several basic methods for calculating this indicator.

The production method for calculating GDP is actually an assessment of a given macroeconomic indicator by taking into account all products in the broadest sense of the word, but without recalculating them. It should be noted that we are talking here only about final goods and services. But researchers cannot go deeper into the question of howsold products are used? Therefore, an indicator was invented, which is called value added. It represents the difference between the market price of a given product and the cost of the materials that the firm spent on its production. GDP is the sum of value added that was produced in the country for a certain period.

Another way is the method of calculating this indicator by costs (by the flow of benefits), it involves the summation of the costs of various business entities for the purchase of final products that they need. In this case, GDP is the result of adding consumer incomes of the population, gross private investment in the economy, the volume of government purchases of goods and services, as well as net exports.

You can also calculate this indicator by income. This method is also called distribution. In this case, the GDP of Russia or any other country is the sum of wages, interest, profits and rents, that is, factor incomes, of all economic entities that operate in the territory of a given country. It is important to understand that the income of both residents of a given country and non-residents is taken into account. Direct and indirect taxes and depreciation must also be included in the calculation of this indicator, because the expenses of some business entities are the income of others.

In addition to GDP, macroeconomic analysis involves the definition of gross national product (GNP). This indicator differs from GDP in that it takes into accountonly services and products produced by residents of a given country, both on its territory and abroad. Similar methods are used to calculate it. GNP is GDP plus the difference between the factor incomes of residents abroad and non-residents operating in the country. Economists also usually determine potential GDP, which implies the full use of all resources available to the state, including labor, as well as a stable price level. It is important just to analyze inflation and the problems of this phase of the economic cycle.