We are familiar with this word as we have seen it in a newspaper or heard on news channels especially when the talk is about the economy but a person who is a novice in economics may have no idea what it means or why is it important. So here, we will discuss very basic information on GDP which will give an idea of what is it all about.
Gross domestic product or GDP is a market value of all finished goods and services produced within a particular country in a specific period of time regardless of the nationality of the producer. For example, a product made by U.S. owned company in India adds up to India’s GDP. It is an important indicator, used to measure the size of the economy.
Nominal v/s Real GDP
Nominal GDP – It is inflation driven GDP as it is calculated with inflation, which means it is the price which is actually increasing. It includes prices of goods and services at current price levels.
Real GDP – It is an inflation-adjusted GDP. It is calculated with prices based on the previous year or definite base year. This type of GDP shows the real picture of economic growth as in this, it is the total production in the country which has increased. A clearer version of real GDP is GDP per capita which will be discussed in further posts.
Why GDP is important?
It is used to determine the economic health of the country. High GDP estimated to be a good economic growth indicator as it depicts less unemployment, high investments, high incomes, etc. But there are certain times where with the growth in GDP, inflation also rises.
Low GDPs indicate, not so good health of a country’s economy as it depicts unemployment, fewer investments, low incomes, etc. This may sometimes lead to a recession.
Economists use GDP to keep a check on inflation and recession and taking important measures to control them on time.