Our today’s topic is going to be a bit off the track from our usual topic in this blog, as we will be discussing a very important topic that most people find difficult to comprehend. What is GDP? Most people must have heard the acronym at least once, either from the News or from the internet or even from social media and in this article, we will not only discuss what it means but also explain what it tells us about a country’s economy.
What is GDP?
GDP is an acronym for Gross Domestic Products, you can see it doesn’t look difficult, but what does it really mean when we are looking at the economy of a country.
Gross Domestic Product or GDP is used to calculate or estimate the monetary value of all the finished goods and services produced within a country in a specific period.
We can also say that, GDP is used to quantitatively measure a country’s economic activity.
Let me give an example, let’s say an investor from Saudi Arabia in Middle East, wants to invest in a start-up firm, he doesn’t want to invest on any start-up firm in a developed nation but rather in a developing nations, so he choose Africa, South America and Asia, but his so sceptical on which country exactly he wants to invest in, in other to choose which of the country has a stable economy he has to look at the GDP of that country for a specific period, the GDP can help indicate which country’s economy is stable and can secure the investor’s capital.
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From the example above, we see that GDP actually, give a brief insight about the economy of a country to both local and foreign investors as well as financial firm, business owner and government official and agencies.
How Does GDP Work
Now, let’s understand how this GDP work, but in order to understand how it work we will first need to look at how it is being calculated.
How is GDP calculated?
The most common formula to calculate the GDP of a country is to add the consumption in country plus the government expenditure plus investments in the country plus goods or services the country export then, minus import the country receive from other countries
That is GDP = Consumption + Government Expenditure + Investment + Export – Import.
Let me break this down:
In other to know the current GDP of a country, the following a considered:
The consumption here is so much that we cannot cover all of it in this article, but they include, house hold consumption, which include food stuffs, the consumptions of goods such as durable and non-durable, services and others like expenses from rents to bills, etc.
This generally include goods and services which the population of a country consume.
This generally involves all the money the government (Federal/ central, state or territory, local or district government) spend or will spend in a given period.
Investments here, doesn’t mean “buying or selling of financial instruments” but means buying material which yield profits such as businesses buying a machinery, constructions of new infrastructures, spending on houses such as buying or leasing, etc.
The reason why buying or selling of financial instruments are not considered as investments in respect to GDP is that, if someone should buy shares in a company and that company decide to use the shareholder’s money to buy a piece of equipment, the purchase of that equipment will be counted towards the nation’s GDP and counting each shareholder’s money will be consider as double counting.
Exportation includes items which are meant to be sent to other country for consumption such item which include goods and services. Country with lots of natural resources such as gold or crude oil usually have a high GDP.
Importation refer to item which are consumed from other countries usually, this include high level machinery, foods, drugs and most times man power. Third world countries usually high a high rate of importation and this really hurt their GDP rate.
What GDP tells About a Country Economy?
GDP tells a lot about a country economy, it’s gives insight weather the country is headed to recession or it the inflation rate are on the rise.
A country that’s in recession, means that there are lesser or slower economic activities going on and a higher inflation rate means a high cost of living.
Though so economics professions might argue that using GDP to analyse the strength or weakness of a country’s economy is not good due to the fact that GDP doesn’t put to account the wealth of the population and some other things such as their purchasing power, apart from that GDP is usually the first things investor look at before going into much details.