On the news, they often talk about the forecasted fall or growth of gross domestic product of various countries. We will understand what GDP means, the formula for calculating what it is, and also what types of this indicator exist.
The concept
GDP is gross domestic product. This indicator is used to assess the economies of various countries. The gross domestic product displays all goods produced and services rendered by the country for which it is calculated. The GDP calculation formula includes all goods and services that have been produced or rendered in the state.
Typically, gross domestic product is calculated over 1 year. In Russia, it is calculated in rubles, and if you need to compare the indicator with other countries, then mathematically convert it into US dollars.
There are several types of GDP, the calculation formula for each of them is different, and they are designed to better reflect the situation of the economy, taking into account various factors.
About nominal gross product
Nominal GDP is the standard indicator for displaying the dynamics of the state economy. Its value depends on the volume of production, as well as changes in the level of prices for manufactured products.
The nominal GDP, the formula of which is given below, cannot be used to compare the development of the economy of different countries. In addition, it is not suitable for comparing the economic development of the same country in different periods.
It is calculated as the sum of all manufactured products and services rendered within the country:
Nominal GDP = ∑ of the country's output + ∑ of the services provided.
Real GDP, its calculation formula and conclusions that can be drawn
Real GDP shows the volume of output and services provided, adjusted for inflation. This type of indicator is closer to understanding the real state of the country's economy and the level of production
There are such cases that GDP increases by several percent during the year, and inflation growth over the same period is more than 10%. And this indicator shows that the state of the economy is deteriorating, even despite the growth of production volumes. That is, to see the real picture, to take into account inflationary processes in the studied period, it is necessary to use real GDP.
The formula for calculating real gross domestic product :
Real GDP = nominal GDP / total price level.
Using the price index, you can calculate their total level, which is used in calculating real GDP. Often, the CPI (Consumer Price Index) is used as a price index. The CPI can be calculated on the basis of the cost of products that are included in the consumer basket.
There are also real GDP calculations based on PPI ( producer price index ). This indicator differs in that only goods manufactured are included in the calculation, excluding the services provided. In this case, only producer prices are used.
This indicator is usually calculated by state statistics authorities in different countries of the world, as well as by private companies that analyze the state of the economy.
Purchasing power parity gross domestic product
To calculate this indicator, the following GDP calculation formula is used:
Gross Domestic Product at purchasing power parity = Nominal GDP in US dollars / number of residents.
This indicator is very doubtful, although it is used to compare the economies of different countries. When calculating it, economists conditionally use the principle of purchasing power parity. According to him, in different countries you can buy the same goods at the same price with the correct conversion of the exchange rate of different national currencies.
Today, the leader in economic development in this indicator is China, which relatively recently surpassed the eternal leader - the United States.
About GDP deflator
The gross domestic product deflator is a special GDP index, the calculation formula of which is as follows:
GDP deflator = (Nominal GDP at current year prices / Real GDP) * 100% at base year prices.
The calculation is based on current prices in the consumer basket, in contrast to the consumer price index based on the prices of the base period.
It is necessary to pay attention to the fact that the calculations take into account all the goods and services that the country has produced. Also, the index does not include goods that have been imported.
Using this index, inflation cannot be fully taken into account. When analyzing a deflator, it is necessary to realize that it takes into account new goods and services, which might not have been in the base period.
GDP is the most important indicator of the state of the country's economy
By analyzing the dynamics of all types of gross domestic product, we can judge the state of the country's national economy. For example, if only the nominal gross domestic product has increased, then this does not mean that production has increased. It is necessary to compare growth with real GDP, which will show the result of economic growth, adjusted for inflation.
And in order to compare the economies of different countries, it is better to use the gross domestic product, which will take into account purchasing power parity. After all, calculating the gross domestic product per person, you can understand the efficiency of production and compare different countries in the population.
It is clear that if the real gross domestic product of a country is constantly growing, this indicates an increase in the well-being of each of all its citizens, as well as an increase in their purchasing power. And if the gross domestic product is constantly falling, the government needs to think about the reasons.