Updated: Aug 13, 2020
Hey guys welcome back, today I want to talk about something very simple which is too complexified by the people. I will try to make it simple, and I can assure you that a 10-year-old will also understand what GDP is, so let's begin.
GDP or the Gross Domestic Product, it is a quantitative measure of how much an economy produces. It includes the monetary value of both goods and services within a specific nation’s borders.
In general terms it is the sum of all the goods and services in a country, a barber is a part of GDP, cars are a part of it, even you reading this post is a part of GDP. Anything by which anyone can earn money is a part of it.
In terms of economics, it is the total of all the costs for goods and services provided in a country.
Everything around you and me contributes to the GDP in some or the other way.
The most basic Formula to calculate Nominal GDP is
I have used the word nominal, there are two kinds of GDPs
So, what is Nominal GDP and what is Real GDP,
Nominal GDP is the total economic output without taking Inflation in account, Inflation is the increase or decrease in the cost of goods and services.
Real GDP, is the total economic output by taking the Inflation in account.
It has a different formula,
Now you have understood what GDP is, but why do we need to know what the GDP ?
It is because it is one of the most used and easiest way to know how a particular country is doing, is it growing or not. Here, i want to introduce you to GDP growth rate, many people confuse GDP growth rate with GDP.
These are two different terms, the value of GDP will be in trillions or billions however GDP growth rate is a percentage so it will always be less than 100.
GDP growth rate in simple terms can be called as the percentage of growth of GDP from last year.
It's formula is:
So now don't confuse yourself and others between GDP and GDP growth rate.
So a higher GDP means the country is doing great, not always it doesn't measure things like how fairly the money is being earned or how the money is being distributed between people.
Moreover, it even doesn't include many very important services, like if someone takes care of you and they get paid for it, it's a part of the GDP on the other hand if your mother does the same exact job that's not counted. It misses a very important service.
But GDP is a good indication of how much an economy produces every year.
So that's GDP for you, It's all around us and it's very good to know about.
Thanks for reading the whole post. Hope you learned something out of it.
Until Next Time, GOODBYE.