One term in economics important to know is Gross Domestic Product or GDP. However, what is GDP?
GDP, or what is known in Indonesia as Gross Domestic Product (GDP), is an important indicator in measuring the economic condition of a country.
So, to learn more about what GDP is, its uses, and how to calculate it, let’s look at the full review below.
What is GDP?
On its official website, the Central Bureau of Statistics defines GDP as an important indicator to know the economic conditions in a country in a certain period.
GDP is the sum of the added value of all business units in a country.
In addition, GDP can also be derived from the total value of final goods and services produced by all economic units.
In short, as mentioned at the beginning of this paper, GDP is one method for calculating national income.
In this case, if the total value of goods and services sold by local/domestic producers abroad exceeds the number of foreign goods and services purchased by domestic consumers, then a country’s GDP tends to increase.
If something like the above happens, the country’s economy will be in a trade surplus condition.
However, on the contrary, what happens, it will lead to a trade deficit with negative reciprocity, namely the country’s GDP will decrease.
What are the Types of GDP?
Gross Domestic Product or GDP is a metric with a specific function.
Meanwhile, the types are divided into two, namely Nominal GDP and Real GDP.
These two types represent calculations for two different economic conditions.
Below is an explanation of each type of GDP, namely as follows:
1. Nominal GDP
In nominal Gross Domestic Product (GDP), an assessment of the economical production of an economic activity carried out by affixing prices applies to the calculation method.
This assessment does not eliminate inflation/price increase rates which can increase economic growth rates.
That’s because all goods and services that count for this type of GDP are valued at the actual prices sold that year.
This type of GDP is commonly used to compare different quarters of output in the same year.
2. Real GDP
The next type of GDP, namely real GDP. This Gross Domestic Product is adjusted for inflation and describes the number of goods and services produced by a country’s economy in a year.
This GDP uses fixed/constant prices from year to year to overcome the effects of inflation/deflation on output from time to time so that the type of real GDP is considered more accurate.
A country’s GDP will increase when prices rise. However, this does not only indicate a change in the quantity/quality of goods and services produced.
Therefore, if you only look at nominal GDP, it will be difficult to decide whether this number has increased due to a real expansion in production or simply because prices have increased.
Therefore, this type of real GDP can be used to compare a country’s GDP from one year to another and see if there is real growth.
How to Calculate GDP?
At least three (3) ways can be used to calculate a country’s GDP.
All three are based on the expenditure, production, and income approach.
Below is an explanation of each way of calculating GDP, which is as follows:
1. Calculating GDP based on Expenditures
Calculating GDP based on expenditure will calculate all funds expended by various groups of participants in economic activity.
Parties included in it are businesses, consumers, and governments.
As for this expenditure method, the calculation of GDP also focuses on expenditure for exports and imports.
This is because several products and services consumed in a country are imported from abroad, and some other local products are sold abroad.
The following is the formula for calculating expenditure-based GDP:
GDP = C + I + G + (X-M)
- C = consumption (representing the number of goods and services purchased by citizens)
- I = Investment (referring to local investment/capital expenditure on new assets that will be useful in the future)
- G = Government (representing consumption spending and gross Investment issued by the government, transportation, military, to infrastructure)
- X – M = Exports – Imports (which is the difference between goods and services produced in the local economy and sold abroad, reducing imported goods and services by local consumers)
2. Calculate GDP based on income
By Revenue, The GDP calculation method will be based on an estimate of GDP from the total income paid to everyone in that country.
This calculation method includes all the factors of production that make up economic activity.
This includes labor wages, return on capital in the form of interest, entrepreneur profits, and land rent.
Later, this calculation method will also be affected by business taxes, net foreign factor income, and Depreciation.
Thus, the calculation is done by adding up all the factors of production fees before deducting taxes.
Here’s the formula to calculate it:
GDP = Total national income + Sales Tax + Depreciation + Net foreign factor income
- Total national income = total rent and wage gain for labor
- Sales Tax = A tax imposed by the government on the sale of goods and services
- Depreciation / Depreciation = Decrease in the value of an asset
- Net foreign factor income = Income from foreign factors, for example, the total income of companies/foreigners
3. Calculate GDP based on production
Finally, there is a production-based calculation. This type of calculation refers to the added value during the production of goods/services produced by a country.
This is estimated by adding up the gross added value taken from the difference between the gross output and intermediate consumption values.
In the calculation, first, calculate GVA or gross added value with the following formula:
GVA = Gross Value Output – Value of Intermediate Consumption
Next, to find production-based GDP, add up all GVA throughout the production process of a product in a certain period.
What are the Benefits of GDP?
GPD has many important benefits for a country, which are as follows:
1. Help make policy
The first benefit of GDP is to help make policy.
In this case, the government, as a policy maker and the central bank, can assess whether the economy is contracting/expanding so they can make the necessary policies as soon as possible.
In addition, GDP also helps to analyze the impact of fiscal and monetary policies, economic shocks, and tax plans and expenditures.
2. Determines the economic health of a country
Second, GDP is useful for determining the economic health of a country.
Here, GDP can be used as a benchmark for whether the country’s economy grows or vice versa.
With GDP growth for consecutive quarters, the economy is developing.
That would signal to economists that there may be inflationary risks and that policymakers must raise the rate.
The goal is to help reduce the impact of GDP growth.
3. Comparing a country with other countries
Apart from these two benefits, GDP can also be used to compare a country with other countries.
The data can later be used for measuring materials with one another.
Take the example of China, which historically has had the largest GDP in the world in the last two decades.
Then, China’s position was followed by the United States, with the largest GDP in the world in 2018.
GDP is an important indicator to determine the economic conditions in a country in a certain period.
GDP can be interpreted as the total added value generated by all business units in a country.
The types of GDP consist of nominal GDP and real GDP. Meanwhile, how calculating it can be done based on (1) expenses, (2) income, and (3) production.
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