GDP Full Form

GDP Full Form

What is the full form of GDP?

GDP represents/shortened form of Gross Domestic Product.

Definition of GDP

GDP is the total monetary or market value of all the finished goods and services produced within the terrestrial boundaries (total geographic area) of a country for the duration of a specific period, typically a year (although it can be calculated quarterly). 

GDP growth rate is an essential indicator of the economic health of a country. It also provides a snapshot of the living standard of the general public residing in a specific country, i.e. increase in the GDP generally reflects an improvement in the living standards.

Understanding the calculation of GDP

GDP calculation for a country is an exhaustive process where all private and public consumptions, government expenditures, investments, embellishments to private inventories, paid-in construction costs, and the foreign balance of trade (i.e., exports are added to the value and imports are subtracted from the value) are taken into account.

Gross Domestic Product or GDP can be measured by the following three ways.

Output Method: In this method, the monetary or market value of all the goods and services produced within the territory is measured. To evade possible errors due to fluctuating price levels, GDP at a constant price (also termed as real GDP) is calculated.

GDP (as per output method) = Real GDP – Taxes + Subsidies.

Expenditure Method: In this method, the total expenditure by all entities on goods and services within the territory of a country is measured.

GDP (as per expenditure method) = C + I + G + BT 

Where, C: Consumption expenditure, I: Investment expenditure, G: Government spending and BT: Foreign balance of trade (i.e., exports minus imports).

Income Method: In this method "the sum of primary incomes distributed by resident producer units" within the domestic boundaries of a country is calculated.

GDP (as per income method) = GDP at factor cost + Taxes – Subsidies.

The factors include compensation of employees (i.e., the total remuneration to the employees for their labor), gross operating surplus (the surplus or profit owing to owners of incorporated businesses), and gross mixed income (the surplus or profit owing to owners of unincorporated businesses).

History of GDP

The rudimentary concept of GDP was introduced by William Petty to protect the landlords against unfair taxation between the Dutch and the English (1652-1674). Later, Charles Davenant made further developments to this method. 

The current measurement system first came to light in a report by the National Bureau of Economic Research, conceived of and presented by Simon Kuznets (an economist) in the U.S. Congress (1937) in response to the Great Depression. 

After the Bretton Woods conference (1944), GDP was widely adopted as the standard tool to measure the growth or decline of national economies.

Different types of GDP

There are several types of GDP measurements, each of which signifies different aspects of the national economy. The following are some examples.

Nominal GDP: Nominal GDP is evaluated considering current market prices.

Real GDP: Real GDP is the inflation-adjusted form, which imitates both the value and the number of goods and services produced by an economy in a specific time frame.

GDP Growth Rate: The GDP growth rate is a measure of the growth or decline of an economy which is calculated based on the change in GDP of successive quarters.

GDP Per Capita: GDP per capita is one important measurement where the total GDP of a country is normalized to the country's population. It is particularly helpful to compare the GDP of various countries.

Criticisms of GDP

There are, of course, several weaknesses in using GDP as an indicator of the national economy. Besides, the dearth of timeliness, some other criticisms of GDP as the ultimate measure are listed below.

• GDP does not account for a number of unofficial income sources.
• GDP is very much geographically constrained in an age of globally open economy.
• GDP very much accentuates material output without taking into count the overall well-being of the population.
• GDP ignores business-to-business activity i.e., it ignores the intermediate spending and transactions between businesses.

The bottom line

Despite several criticisms, GDP is still the ultimate measure of a country's economy. However, several advanced methods are coming up, which can replace this calculation system.