Gross Domestic Product represents the total market value or the total monetary value of the goods & services produced in the nation’s economy within a given time period (usually a period of one year). Calculation of GDP is the most widely used method to calculate the size of the economy of the nation and includes only the market value of initial production of goods & services and not the sale and resale of the goods produced.
GDP is used to measure the overall economic output produced in a nation in a particular period of time. It is a measure of growth & development in a country and also helps to know whether the nation is going through the state of recession or inflation. The Gross domestic product is the sum of all the goods & services produced in the economy, therefore, only the development that can be defined in monetary terms are included in GDP and the factors that are quantitative in nature are only analyzed.
Approaches to calculate Gross Domestic Product (GDP):
Various approaches to calculate GDP are:
- Expenditure Approach
- Income Approach
- Production/Value Added Approach
Advantages of Gross Domestic Product (GDP):
The advantages of GDP are as follows:
- The Calculation of GDP is based on the monetary figures that can be easily estimated and determined.
- The measure of GDP helps to know the buying power of the country over a period of time and the standard of living of the people in the nation can be estimated with the GDP because if the GDP of nation increases than it shows that the standard of living increases and vice versa.
- GDP is evaluated by the investors while investing in the other’s nation economy as GDP is considered to be the measure of economic potential of a nation.
- The uniform mechanism is followed across all nations to calculate the GDP, which makes the comparisons between the different country’s economy easier and understandable.
Disadvantages of Gross Domestic Product (GDP):
The disadvantages of GDP are as follows:
- GDP doesn’t take into consideration the intangibles and non-monetary variants of the economy such as health care, social development, education, women empowerment etc. and these variants are also important to determine overallstatus of any country.
- The transactions that occurs as barter mode (exchange of goods for other goods) or without any consideration are not included in the GDP of a nation. Therefore, GDP fails to reflect above economic activities that may be important for any nation.
- Even the factors like destruction caused to the environment and nature while producing & consuming the goods & services are not considered in GDP and these factors are also important to analyze the sustainable economic growth & development.
Thus, Gross Domestic Product is the total monetary value of the goods & services produced in an economy. Most commonly the market value of goods & services produced are added to calculate the GDP. Different approaches are prescribed to calculate GDP based on different factors. GDP is the measure that shows the potential of economy but at the same time GDP fails take into consideration various non-monetary factors that also plays a major role in an economy.