Gross Domestic Product
- Cecilie
- 6. aug. 2016
- 2 min læsning
Importances:
Terms:
⭐️ Constant prices: Adjusts GDP for changes in inflation.
⭐️ Current prices: Measures GDP using the current price level.
⭐️ Gross Domestic Product (GDP): A measure of economic activity in a country. The total value of what has been produced within a given country during a specific period of time.
What is gross domestic product and what does it measure?
Gross Domestic Product (GDP) is a measure of the value of the total production in a country during a given period of time.
It is the sum of the value of all goods and services produced in a country minus the raw material used (= the sum of the price times the quantity minus the raw materials and semi-manufacture).
GDP = the value of the total production = the total income in society
<=>
Production = income*
More production means that the income will be higher. The production becomes income when the employees get a salary for what they produce.
If you want to compare countries' GDP you have to take the size of population into account – usually, we compare GDP per capita.
Furthermore, when we compare GDPs we usually use US Dollars (USD) as the currency. Moreover, you also have to take the purchasing power parity (PPP) into account when doing the comparison.
GDP expresses the economic ressources available in a country.
Which kinds of production is a country's GDP made up of?
The short answer is: All kinds of production – both goods and services. Public services are also a part of GDP.
However, some economic activities are not a part of GDP, these include (but are not limited to):
"Black work" is not a part of GDP which means that a country's total production is bigger than the official GDP.
Voluntary work, since the volunteers do not get paid and the work is not reported.
Welfare benefits are likewise not counted in GDP since there is no production behind them because they are created by people who have paid their taxes and thereby produced something – the value is therefore counted in GDP somewhere else.
Childcare and other production in the homes for own consumption. Therefore there is a big part of the production in the less developed countries that is not included in GDP. (From Ha-Joon Chang's "Economics: The User's guide", 2014, p. 216: "The classic joke among economists is that you reduce your national output if you marry your housekeeper.")
Current prices vs. constant prices
Current prices do not consider the inflation. This means that if you want to compare, say, two different countries' GDPs you cannot get the right picture if you compare the current prices, since the inflation differs from country to country. Therefore we set one specific year as the year we measure from. Moreover, if you want to compare GDP over more than one year the inflation will most likely increase and the last year's GDP will therefore be the highest.
We therefore use constant prices because it gives us a more comparable foundation and we thereby get the real GDP.
*This is however not always the case, cf. Ha-Joon Chang's "Economics: The User's guide", 2014, chapter 6.