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Gross domestic product (GDP) – it is the market value of all goods and services which are officially recognized, within a country in a given time period. This parameter is an indicator of a standard of living of a country. GDP per capita is not a personal income measure, it is equals the GDI (gross domestic income) per capita. Gross domestic product is actually related to the national accounts, and this is a macroeconomics subject. And it is not to be confused with GNP (Gross national product), which is related to a production based on ownership.
Gross domestic product was developed for a US Congress report in 1934 by Simon Kuznets. In this report he said, that GDP is not a measure of welfare. After 1944, GDP became the most important tool for measuring an economy.
The main three ways in which GDP can be determined are the expenditure approach, the income approach and the product approach. Actually, all these three ways give the same result.
The product approach is the most direct of all three – it sums the outputs of every enterprise class to arrive at the total. The approach of expenditure works on the principle that somebody must buy the entire product, therefore, the value of the total product is just people’s buying thing total expenditures. The income approach is based on the principle that the “ producers (the incomes of the productive factors) must be equal to their product value, and determines gross domestic product by finding the all producers’ incomes sum.
For example, let’s illustrate the expenditure method:
GDP= private consumtion+gross investment+government spending+
This formula can be rewritten in the following form:
The production approach can be written symbolically in the next way:
Net Value Added= Gross Value of output-Value of Intermediate Consumption
Value of Output= Value of the total sales of goods and services+
+Value of the total sales of goods and services
This sum is also known as GDP at factor cost. Gross domestic product at factor cost + indirect taxes minus subsidies on products is GDP at Producer Price.
The other way of determining GPD is to find the total income. GDP calculated this way also sometimes called GDI (gross domestic income) or GDP(I). This method determines GDP by adding all firms income, which are paid to households for factors of production they hire – interest of capital, wages of labor, profits for entrepreneurship and rent for land.
Incomes are usually divided into five categories:
– Corporate profits
– Wages, salaries, and supplementary labour income
– Farmers’ income
– Interest and miscellaneous investment income
– Income from non-farm unincorporated businesses
The sum of these five components is net domestic income at factor cost.
The formula for GDP by income method has a form:
Where R is rents, I – interests, P – profits, SA – statistical adjustments (dividends, corporate income taxes, undistributed corporate profits), W – wages.
There is international standard for measuring gross domestic product provided in “ System of National Accounts” (1993). This book was prepared by International Monetary Fund, European Union, United Nations, Organization for Economic Co-operation and Development and World Bank.
1) French President seeks alternatives to GDP, The Guardian 14-09-2009.
European Parliament, Policy Department Economic and Scientific Policy: Beyond GDP Study
2) United States Bureau of Economic Analysis, A guide to the National Income and Product Accounts of the United States , page 5; retrieved November 2009.