Gross Domestic Product

GDP is the monetary value of all final goods and services produced in a country in a given period of time,
which includes both Imports and Exports, Both Domestic and Foreign income, it states the economic
position of a country. GDP can only be estimated it cannot be measured because we are aggregating
extremely different goods and services. The gross domestic product is the best measure of a nation’s
total output of its goods and services. Even though GDP is used for many purposes it is mainly used to
measure the overall performance of the economy.

VIEW OF EXPENDITURE

Goods and Services

CONSUMER EXPENDITURE

WAGES, RENT, DIVIDENDS

HOUSEHOLDS FIRMS

FACTORS OF PRODUCTION

Any illegal activity like black market will not be considered as a part of GDP. When a final or
intermediate good is exported it becomes a material and hence it becomes a part of GDP. Transfer of
ownership (sale of land or sale of second hand good) or Transfer of assets and liability isn’t a part of
GDP. Since interest rate is a part of current income it becomes a part of gross domestic product. GDP
can be measured in two entirely independent ways that is it can be measured as a Flow of products or
as the Sum of earning. In flow of product approach, it only considers goods which are ultimately bought
and used by consumers and households spend their income for these consumer goods. Thus, in a simple
economy it can be used calculate the National income or Product as the sum of an annual flow of final
goods and services. Earnings or Income Approach is the second equivalent way to calculate GDP it
includes all the flow of costs of doing business these costs include the wages to be rewarded to labor,
the rents rewarded to land the profits paid to capital. Business costs are also the incomes that
households receive from firms, hence by measuring the annual flow of these earnings or income we can
arrive at GDP.

DOUBLE COUNTING

Double counting refers to faulty practice of counting the value of nations good more than once. By
taking the value of final goods its value also gets included in it this is because every producer treats the
commodity he sells as final product regardless of how it is used whether as a final or intermediate good,
like this certain items are counted more than once resulting in over estimation of national product to
the degree of the value of intermediate goods included. In order to avoid double counting value added
method can be used to measure where the value gets added at each stage, by deducting all
expenditures on the intermediate goods received from other firms, the lower loop earnings approach
eliminates all double counting and reward wages, interest, rents and profit exactly one time.

REAL GDP, NOMINAL GDP, GDP DEFLATOR

Nominal GDP or Current GDP is an evaluation of economic production in an economy which uses current
market price and current quantity, GDP changes because of change in quantity, price, or both.it is
calculated using changing prices. Real gross domestic product or Constant GDP is a macroeconomics
measure of the value of economic output adjusted for price changes (that is inflation or deflation), it
uses the base year price or constant prices and current quantity, real GDP is used compare two years
production of a country. It is calculated using change in volume of total output after price changes are
removed.

REAL GDP
GROSS DOMESTIC PRODUCT

NOMINAL GDP

YEAR

Nominal GDP grows quicker than Real GDP due to of price inflation.
GDP Deflator: The difference between Nominal GDP and Real GDP is the price of GDP, sometimes called
the GDP Deflator. It is the sum of the level of prices of all new domestically produced final goods and
services in an economy in a year.

Nominal GDP = GDP Deflator

Real GDP

When GDP Deflator = 1 then Nominal GDP = Real GDP, it means price of current is the same as the price
of base year. Real GDP changes only when output changes.

Components of GDP

Consumption (C): It is the monetary value of total products consumed by the people in a country.

Investment (I): it is the total investment made in a country.

It can be surplus
Net Exports (X-M): total export – total import
It can be deficit

Government Expenditure (G): it includes all government consumption, investment, and transfer
payments.
 YEAR 2014 2015 2016 2017 2018
AUSTRALIA $1.47 $1.35 $1.21 $1.33 $1.43
CANADA $1.80 $1.55 $1.53 $1.65 $1.71
INDIA $2.04 $2.10 $2.29 $2.65 $2.73
MEXICO $1.32 $1.17 $1.08 $1.16 $1.22
FRANCE $2.85 $2.44 $2.47 $2.59 $2.78
(US Trillion Dollars)

Chart Title
$3.00

$2.50

$2.00
Trillion $

$1.50

$1.00

$0.50

$-
2014 2015 2016 2017 2018
Year

AUSTRALIA CANADA INDIA MEXICO FRANCE

AUSTRALIA: Is a sovereign country which was 13th national economy by nominal GDP, during 2014 the
nominal GDP growth rate was $1.47 trillion and then later it fell to $1.35 trillion during 2015, The economy
was dominated by the service sector and labor force. In 2018 GDP in nominal terms was $56,420 However,
the Australian economy fell low from last quarter it must have an aggressive monetary and fiscal stimulus
in order to reduce unemployment and inflation.

CANADA: the Canadian economy is highly developed market economy, it is the 10th largest in nominal
terms. The economy was driven by service sector and the country is also known for its highest valued
natural resources. During 2014 GDP in nominal terms was $1.80 trillion and the fell to $ 1.55 trillion during
the period of 2015. The GDP per capita was $ 46213 during 2019 and the inflation rate during 2018 was
2.243%.

INDIA: It has a developing marketing economy and is considered to be the 5th largest by nominal GDP.
During 2014 the GDP in nominal terms was $2.04 and then it grew to $2.10 during 2015, India economy
has a long term growth perspective due it young population, good savings and investment rates , however
during 2017 because of demonetization the economy fell, the inflation rate during the period of 2018 was
3.428% and the nominal GDP per capita currently is $2172.

MEXICO: the economy of Mexico is a developing market economy; it is considered to be the 15 th largest
in nominal terms. However, the Mexican economy was one nation which was the most affected by the
208 recession the nominal GDP during 2014 was $ 1.32 trillion and it fell to $1.17 trillion during 2015.
The GDP per capita rank of Mexico is 66 and the nominal GDP per capita is $9797 during 2018.

FRANCE: the economy of France is highly developed and free market oriented; it is considered to be the
7th largest in nominal terms. The key sector in development is the chemical industry and manufacturing
industry. During 2014 the nominal GDP in terms was $ 2.85 trillion and then fell to 2.44 trillion. The per
capita in nominal terms during 2019 was $41761 and the inflation rate during 2018 was 2.108%.

EXTERNAL READINGS

GDP AS A MEASURE OF WELFARE – GDP being the best measure of GDP it can be used to measure the
economic growth within a country. GDP is considered to have several flaws hence careful decisions must
be taken while interpreting the GDP as it does not look into Housework and Childcare, Leisure the
underground economy and pollution.

Housework and childcare: all the transactions that take place in an organized market are ignored. As
these services are not transferred through market.

Leisure: the leisure time spend will also not be considered as a part of GDP, because GDP is only bound
to measure production that takes place in an economy.

Underground GDP: these include transaction which are not informed to the official authorities. these are
legal transaction but it is not recorded so that an individual can cut down on the amount of tax he has to
pay.

THE LINK BETWEEN SELF -REPORTED HAPPINESS AND GDP – Two economist David Blanchflower and
Andrew Oswald stated how happiness can vary in a business life cycle. They state that men and women
are the happiest during the age of 49 and 45 because this is the period, they tend to posses the highest
amount of earnings. Individuals who tend to have higher income are said to be happier keeping the
other factors constant. Even unemployment and a divorce can lead to a drastic fall in the levels of
satisfaction.