GDP and its importance

Gross Domestic Product or GDP represents the economic health of a country. It presents a sum of a country's production which consists of all purchases of goods and services produced by a country and services used by individuals, firms, foreigners and the governing bodies.

Calculation of GDP comprises of several components.

Importance of GDP
  • GDP consists of consumer spending, Investment expenditure, government spending and net exports hence it portrays an all inclusive picture of an economy because of which it provides an insight to investors which highlights the trend of the economy by comparing GDP levels as an index
  • GDP is used as an indicator for most governments and economic decision-makers for planning and policy formulation
  • In case of GDP, each component is given the weight of its relative price. In market economics it clicks as prices reflect both marginal cost of the producer and marginal utility for the consumer, i.e. people sell at a price that others are willing to pay
  • GDP helps the investors to manage their portfolios by providing them with guidance about the state of the economy
  • Calculation of GDP provides with the general health of the economy. A negative GDP growth portrays bad signals for the economy. Economists analyse GDP to find out whether the economy is in recession, depression or boom
Gross Domestic Product is good measure for an economy and with improvement in research and quality of data, statisticians and governments are trying to find out measures to strengthen GDP and make it a comprehensive indicator of national income.

The GDP of a country can be calculated in the below mentioned rates

  • Expenditure approach,
  • Income approach
  • Value-added approach
Following is a simple way to calculate the GDP. GDP = consumption + investment + government spending) + (exports-imports) and the formula is GDP = C + I + G + (X-M) where

C= spending by consumers,
I= investment by businesses,
G= government spending and
(X-M)= net exports, that is, the value of exports minus imports. Net exports may be negative i.e. imports are more than exports.

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