How to find out how well and productively the country's economy copes with its tasks? Is it possible to calculate its activity for a certain period of time? Of course, this is possible. For this purpose, the value of gross domestic product (abbreviated GDP) is used in macroeconomics.
GDP is the sum of the market values of services and goods intended for final use and manufactured over a certain period of time in the territory of a given country. There is nominal as well as real GDP. Let us consider these important definitions in more detail.
Nominal GDP is an indicator that measures the value of aggregate output at prices of the period considered in the calculations. It changes every year. There are two reasons for this. Firstly, the market value of services and goods is changing. Secondly, the total physical volume of output is also growing or, conversely, is falling. For example, during this period, prices for all categories of services and goods doubled. Consequently, the nominal GDP also doubled, however, this does not mean that the economy functioned better and more efficiently in this period of time. In order to separate the changes in GDP that occurred due to higher and lower prices, from changes in GDP that are directly dependent on the volume of output, real GDP was introduced. In order to find this value, it is necessary to make some calculations.
Real GDP is an indicator that measures the physical volume of services and goods produced over different time periods by evaluating all products manufactured in both periods at constant prices. That is, the calculation of the GDP in question allows us not to take inflation into account.
Real GDP helps to understand how much the economic situation has improved or worsened over the year. For example, it is necessary to compare the volume of GDP for 2011 and 2012. To do this, you need to multiply the volume of all released goods and services for each year by their prices in 2011. This approach allows you to see the actual growth of manufactured products.
The calculation of real GDP can be obtained in another way. For this, it is necessary to divide the nominal GDP by the value of the GDP deflator or the GDP price index. This will require additional calculations. The GDP deflator is an analogue of the CPI (Consumer Price Index). It allows you to find out changes in the value of products included in the GDP. Calculation of the deflator requires the election of a certain range of services and goods. The set includes, in addition to the cost of the consumer basket, goods purchased by the government, products traded on the world market, investment goods. The GDP deflator, in contrast to the CPI, is based on the current structure of production. It is worth noting that deflators of different years cannot be compared, as they reflect different sets of goods.
That is, in a different way it can be said that real GDP is GDP, “cleared” of the effects of changes in price levels. We give an example. The inflation rate was 15%, and nominal GDP increased by 20%. This means that real GDP grew by 5%. It is worth noting that the formula used in this example can be used only at low rates of change, that is, with a small level of inflation.
Let us consider in more detail the main points that you need to keep in mind when calculating GDP. Products intended for final use must be considered. That is, intermediate goods do not appear in the calculations. For example, when you include the cost of a car in calculating GDP, you do not need to separately calculate the price of its wheels.
When calculating GDP, services and goods manufactured for the considered time period are taken into account. GDP is at market prices. The GDP includes only those services and goods that are produced in the territory of a given country.