GROSS DOMESTIC PRODUCT (GDP)

GROSS DOMESTIC PRODUCT (GDP)

               It is a key concept used in the measurement Of total income of a nation. Gross domestic product is the total market value of all final goods and services produced within a country in a given period of time. According to Shapiro “GDP is defined as a flow variable, measuring the quantity of final goods and services produced during a year? The essential features of GDP are:

(i) GSP IS THE TOTAL MARKET VALUE. It measures the total market value of output at current market prices.

(ii) ALL GOODS AND SERVICES. GDP measures the market value of all goods (cloth, furniture etc.) and services (accountant, doctor, etc. services) produced on the economy.

(iii) FINAL GOODS. GDP includes the value of only final goods. The value of intermediate goods (yarn for example to avoid double counting)

(iv) CURRENTLY PRODUCED GOODS.  GDP includes only the value of those goods and services which are currently produced. For example, a person sells his old house to another person he value of the house is not include in GDP.

(V) DOMESTIC TERRITORY. It includes the value of output of goods and services produced by all enterprises whether resident or non-resident located within the domestic territory of a country.

(vi) TIME PERIOD. GDP includes the value of all final goods and services produced in a given period of time is usually a year.

(vii) FLOW CONCEPT. GDP measure the flow of income produced by all producing enterprises during a year.

COMPONANTS OF GROSS DOMESTIC PRODUCT

           There are four categories of expenditure which are added together to measure the gross domestic product (GDP) at market price. These four components of GDP

(1) Consumption (c)

(2) Investment ( I )

(3) Government purchases (G)

(4) Net export (X-M) these four types of expenditure are explained in brief.

(1) CNSUMPTION ( C )  Consumption expenditure includes all spending by households on goods and services in a period of one year. Goods include both durable consumer goods such as car, television and non-durable consumer goods such as clothing, fruits, etc. services on which households spend money are intangible items as teachers services, legal services transport and communication etc.

(2) INVESTMENT (I). Investment is an addition to capital stock. It is the expenditure incurred by business on the purchases of goods which are used to produce more goods and services in the future. Thus investment includes purchase of new capital and inventories ( increase in the stock of goods on hand ).

(3) GOVERNMENT EXPENDITURE (G). The government expenditure includes all types of expenditure which are incurred by federal, provincial, local bodies on the purchases of goods and services. It includes wages and salaries paid to the employees and spending on public works.

(4) NET EXPORTS. Net exports are the difference between value of exports (X) and value of imports (M) = (X-M). The expenditure on exports generate income for the residents working in our country. The expenditure on imports generate income of the countries from where the goods are imported.

Thus GDP = C +1+G+NX(X-M).