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Gross Domestic Product - The Macroeconomic Measure of an Economy's Performance

Gross Domestic Product:

Gross Domestic Product or GDP is one of the measurement which economists, governments and investors use to measure productivity and growth of an economy. GDP represents the total monetary value of all the final products / services produced by all people and organisations over a given period of time. The Organisation for Economic Co-operation and Development (OECD) defines GDP as "an aggregate measure of production equal to the sum of the gross values added of all resident and institutional units engaged in production (plus any taxes, and minus any subsidies, on products not included in the value of their outputs).” As per International Monetary Fund (IMF) "GDP measures the monetary value of final goods and services - that are bought by the final user - produced in a country in a given period of time (say a quarter or a year).". By far, GDS is one of the most powerful measure to indicate productiveness of a country in the world.

Approaches to measure GDP?

There are three approaches to measure GDP of an economy, namely:

• Output / Production Approach
• Income Approach
• Expenditure Approach 

Let us understand all three approaches into greater detail:

Output / Production Approach:

• This approach of measuring GDP takes into consideration the value of output and value of total goods / services used in output.
• This approach tries to find out the gross value added by an economy during given period of time.
• In this approach, the entire economy is considered to be a mass production process.
• The cost of goods and services used in production is called intermediate consumption or intermediate inputs .
• The Gross value Added is found out with the help of following formula:
• Gross value Added = Gross Value of Output - Value of Intermediate Consumption
• Gross Value added is also called GDP at Factor Cost
• Gross Value of Output = Total Value of Goods and services including value of changes in inventory level.
• GDP at Producer Price = GDP at Factory Cost + Indirect Taxes - Subsidies

Income Approach:

1. GDP can also be measured by adding all the incomes generated in production process of goods and services. This approach takes into consideration various incomes like:

• Wages, salaries, and supplementary labour income
• Corporate profits
• Interest and miscellaneous investment income
• Farmers' incomes
• Income from non-farm unincorporated businesses

2. In simple words, income approach measures the total income earned by all individuals and organisations (Factors of Product) in a country.

3. GDS is calculated with the help of below formula in this method:

• GDS = GDP at Factor Cost + Taxes - Subsidies

Expenditure Approach:

1. Unlike Income Approach, this method tries to measure total amount spent by all factors of productions like individuals, organisations.
2. GDP under this approach is measured with the help of the following formula

• GDP = Consumption Expenditure + Investment Expenditure + Government Spending + Net Exports

What does GDP indicate?

• In the language of economists, a constant decline of GDP for two consecutive quarters would indicate "recession" in the economy
• A sharp rise in GDP rate indicates high rate of inflation in the economy.

Top Ten Countries / Regions by Nominal GDP: