GDP
Module 4
What is Gross Domestic Product
(GDP)?
• Gross Domestic Product (GDP) is the monetary
value, in local currency, of all final economic goods
and services produced in a country during a specific
period of time.
• It is the broadest financial measurement of a
nation’s total economic activity.
• The total goods and services bought by consumers
encompasses all private expenditures, government
spending, investments, and exports but excludes
imports that take place within a designated country.
• Below are three different approaches to the GDP
formula.
Why is GDP Important to
Economists and Investors?
• Gross Domestic Product represents the
economic production and growth of a
nation and is one of the primary indicators
used to determine the overall well-being of
a country’s economy and standard of living.
One way to determine how well a country’s
economy is flourishing is by its GDP growth
rate. This rate reflects the increase or
decrease in the percentage of economic
output in monthly, quarterly, or yearly
periods.
Why is GDP Important
• Gross Domestic Product enables economic
policymakers to assess whether the
economy is weakening or progressing if it
needs improvements or restrictions, and if
threats of recession or inflation are
imminent. From these assessments,
government implementing agencies can
determine if expansionary, monetary
policies are needed to address economic
issues
Why is GDP Important
• Investors place important on GDP growth
rates to decide how the economy is changing
so that they can make adjustments to their
asset allocation. However, when there is an
economic slump, businesses experience low
profits, which means lower stock prices and
consumers tend to cut spending. Investors
are also on the lookout for potential
investments, locally and abroad, basing their
judgment on countries’ growth rate
comparisons.
How GDP Affects You
• GDP impacts personal finance, investments,
and job growth. Investors look at a nations'
growth rate to decide if they should adjust
their asset allocation. They also compare
country growth rates to find their best
international opportunities. They
purchase shares of companies that are in
rapidly growing countries.
• to determine which sectors of the economy
are growing and which are declining
What is the GDP formula?
• There are three methods or formulas by
which GDP can be determined:
• 1 Expenditure Approach
• Income Approach
• Production or Value-Added Approach
Expenditure Approach
Income Approach
• This GDP formula takes the total income generated by
the goods and services produced.
• GDP = Total National Income + Sales Taxes +
Depreciation + Net Foreign Factor Income
• Total National Income – the sum of all wages, rent,
interest, and profits.
• Sales Taxes – consumer tax imposed by the government
on the sales of goods and services.
• Depreciation – cost allocated to a tangible asset over its
useful life.
• Net Foreign Factor Income – the difference between the
total income that a country’s citizens and companies
generate in foreign countries, versus the total income
foreign citizens and companies generate in that country.
Production or Value-Added
Approach
• The sum of the value added to a product
during the production process. To
determine the value added between
businesses, the price at which the product
is sold by the seller is deducted from the
price it was bought for from the supplier.
What are the Types of GDP?
• GPD can be measured in several different ways. The
most common methods include:
• Nominal GDP – the total value of all goods and
services produced at current market prices. This
includes all the changes in market prices during the
current year due to inflation or deflation.
• Real GDP – the sum of all goods and services
produced at constant prices. The prices used in
determining the Gross Domestic Product are based on
a certain base year or the previous year. This provides
a more accurate account of economic growth, as it is
already an inflation-adjusted measurement, meaning
the effects of inflation are taken out.
• GDP measured by Purchasing Parity Process
GDP growth rate
• Growth Rate: The GDP growth rate is the
percentage increase in GDP from quarter
to quarter.
• It tells you exactly whether the economy
is growing quicker or slower than the
quarter before.
• Most countries use real GDP to remove
the effect of inflation.
• If the economy produces less than the
quarter before, it contracts and the growth
rate is negative. This signals a recession.
If it stays negative long enough, the
recession turns into a depression.
GDP per Capita
• GDP per Capita: GDP per capita is the best way to
compare gross domestic product between countries.
This divides the gross domestic product by the number
of residents.
• It’s a good measure of the country's standard of living.
Some countries have enormous economic outputs
only because they have so many people. In 2017, the U.
S. GDP per capita was $59,500.
• The best way to compare GDP per capita by year or
between countries is with real GDP per capita.
• This takes out the effects of inflation, exchange rates,
and differences in population. In 2007, the United
States lost its position as the world's largest economy.
