GDP Definition and Meaning

GDP Definition and Meaning

Gross domestic product, abbreviation GDP by ABBREVIATIONFINDER, measures the total income and thus the economic performance of a country. The GDP says something about the economic prosperity of a society.

The gross domestic product indicates the value of all goods and services that were produced by residents and foreigners within a certain period of time (usually one year) within the national borders. If you compare the GDP of different years, you can see how the economy of a country, the so-called national economy, is developing. GDP regards the economy as a whole and summarizes all households and companies.

If you calculate the GDP for Germany, you measure the incomes of all people who live here and earn their money in Germany. However, this does not include the income of Germans who earn their income abroad. The German GDP is therefore the value of all goods and services that the workers in Germany have generated.

Nominal GDP

When calculating GDP, a distinction is made between nominal and real GDP. The nominal GDP is calculated on the basis of the current prices. If the price of a certain good rises (e.g. the price of bread rolls rises from 30 cents to 35 cents), GDP also rises. The formula for calculating GDP is: GDP = price multiplied by quantity sold. Nominal GDP is an imprecise basis for assessing economic growth.

Example

In 2018, 1 million rolls at 30 cents each were sold within one country. The GDP will then be 300,000 euros. In 2019, sales fell, but the price rose. 900,000 rolls were sold for 35 cents. The GDP rises to 315,000 euros, although economic performance has fallen.

Real GDP

Real GDP, on the other hand, takes the price increases out of the equation. In addition, the prices of all goods and services always relate to a selected base year. Real GDP is therefore always calculated using constant prices. The formula for calculating GDP is: GDP = price of a base year multiplied by the quantity sold.

Example

In 2018, 1 million rolls at 30 cents each were sold within one country. The GDP will then be 300,000 euros. In 2019, 900,000 rolls were sold for 35 cents. To calculate real GDP, choose 2018 as the base year and thus 30 cents per bread roll. This will reduce GDP to 270,000 euros. If 1.2 million rolls are sold in 2020, GDP will rise to 360,000 euros.

The base year price is always used to calculate real GDP.

Gross Domestic Product

GDP, abbreviation GDP, English Gross Domestic Product [ grə ʊ s d ɔ mεst ɪ k pr ɔ d ʌ kt], abbreviation GDP [d ʒ i ː di ː pi ː ]Value of all services provided by residents and foreigners in a specific period within a (regionally defined) economy, provided they were not used in the domestic production process in the same period. The GDP is a summarizing measure for the value of the economic services, which result from the domestic production activity in the observed period.

It is determined within the framework of the generation calculation of the national accounts (VGR) as the sum of the gross value added ( value added) of all economic sectors plus the excess of taxes on goods over the subsidies on goods. The gross value added results from the production values ​​minus the intermediate consumption. On the other hand, GDP is also determined in the context of the usage calculation. On the expenditure side, GDP is the sum of consumer spending by private households, private non-profit organizations and the government, gross fixed capital formation, changes in inventories and net additions to valuables, as well as the external contribution.

The GDP differs from the gross national income (national income; formerly referred to as gross national product in the national accounts) by the balance of the primary income (compensation of employees, company and property income) of residents and foreigners. It is calculated in current prices and adjusted for prices (nominal and real GDP). The measurement of real GDP was changed in 2005 in the national accounts from the fixed price basis (most recently in 1995 prices) to an annually changing price basis (previous year price basis). The percentage change in real GDP is an important indicator of economic growth and the business cycle.

GDP