Thursday 20 December 2018

Gross domestic product (GDP) – definition & approach

Gross domestic product

Definition of gross domestic product or Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the calculation that is use by a country as a primary measure for its national economy activity, but basically the GDP measure the entire production volume from a region (State) geographically.

While meaning that GDP measures the market value of final goods and services produce by resources that are locate in a country during a specify time period, usually one year. GDP can also be use to study the economy from time to time or to compare some of the economy at some point.

Gross domestic product includes only final goods and services, namely the sale of goods and services to the user. For goods and services purchase for processing again and again (intermediate goods and services) are not include in GDP in order to avoid the problem of double counting or double counting, that is, compute a product more than once.

GDP types

There are two types of GDP, namely:

  • GDP by nominal GDP or price, i.e., the value of goods and services produce in a given year a country is assess according to the applicable price in that year.

  • The GDP by real GDP or fixed price, i.e., the value of goods and services produce in a given year a country is assess according to the applicable price in any given year which in turn is use to assess the goods and services produce in other years the GDP figures is the result of the multiplication of the number of production (Q) and price (P), if prices go up from year to year because of inflation, then the magnitude of the GDP will go up anyway, but not necessarily the rise indicates the number of production (real GDP). Maybe the rise in GDP was only cause by rising prices, while production volume fix or slump.

The calculation of the GDP

There are two kinds of approaches are used in the calculation of GDP, namely:

  1. The expenditure Approach, the sum of the whole aggregate spending on all final goods and services produce for one year.

  2. Income Approach, the entire aggregate income sum receive during one year by those who produce such output.

GDP Expenditure Approach based on.

To understand the approach of spending in GDP. We divide the aggregate expenditures into four components, consumption, investment, Government purchases and net exports. We will discuss it one by one.

    1. Ingestion of, or more specifically the individual consumption expenditure, is the purchase of goods and services by households for one year. For example: dry cleaning, haircuts, air travel, etc.

    2. The Investment, or more specifically gross private domestic investment, is shopping on new capital goods and for additional supplies.
      For example: building a new machine and purchase companies to produce goods and services.

    3. Purchase of the Government, or more specifically gross government investment and consumption, includes all levels of Government all expenditures on goods and services, from cleaning up the cleaning Chamber of the Court, from the book library to library Clerk's wages. In this Government purchases do not include social security, welfare assistance, and unemployment insurance. Because the payment reflects government assistance to recipients and does not reflect the Government's purchases.

NET Exports,

Equal to the value of exports of goods and services a country minus imports of goods and services with the country. Net export value include not only trade in goods but also services. In the expenditure approach, the country's aggregate spending is equal to the sum of consumption, C, investment, Government purchases, I, G, and net exports, i.e., export value, X, minus the value of imports, M, or (X-M).

The summation of these components generate aggregate expenditure, or GDP:

C + I + G + (X-M) = aggregate Expenditures = GDP

GDP base on the income Approach.

Aggregate income equal to the sum of all income receive the owner of resources in the economy. Because its resources are use in the production process. Double-entry bookkeeping system can ensure that the value of the aggregate output is equal.

To the aggregate revenue paid for the resources use in the production of that output:

Namely wages, rent, interest, and profit from the production.

So we can say that:

The aggregate Expenditures = GDP = aggregate income of A finish product is usually process by some companies on its way to the consumer.

Wooden table, for example, initially as raw wood. Then cut by the company first, cut according to needs of furniture by the second company. Create a table by a third company, and sold by the four companies. Double counting is avoid by means of only taking into account. The market value of the counter at the time of sale to the end user or by calculating the value added at each stage of production.

The added value of any company is equal to the selling price of the goods of the company. It is reduce by the amount payable upon the input of other companies.

The value added of each stage reflects the top income owners resource at the stage in question. The sum of value-added at all stages of production equals. The market value of final goods, and is summing the value added of the whole final goods and services is equal to GDP base on the income approach.

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