Learning the Effects and Implications of Gross Domestic Product
GDP or Gross Domestic Product is basically the total output of the country. The term “output” is often referred to as the product or profit but in GDP, this term encompasses a lot of things. This takes into consideration the output of every individual and companies around the country until its borders. The output is not only limited on salary and earnings but also on products and services rendered. The data extracted from GDP is often considered as the gauge for the country’s economic standing. Although GDP is not very definite in determine the living conditions of the general population of the country, it is still useful for the country to show they are actually improving in some way.
Methods of Determining GDP
Product Approach
This approach relies heavily on the basic concept of consumption. This approach believes that every product will be ultimately used by another person. This indicates that the expenditures or spending of a single person is equal to the products created. The idea of products is also applied to the services received or rendered. This is a very basic approach in determining the country’s GDP because it uses individual interaction with other businesses and services.
Income Approach
In this approach, the GDP is determined by the “producers.” Every company, small business and individuals who has the capacity to earn through products and services will be counted as producers. The GDP is determined by the earnings received by its products. It’s also another straightforward approach in determining the GDP since it only deals with the income or earnings (monetary and non-monetary) of the producers.
The income approach follows a specific formula:
GDP = Employee Compensation + Gross Operating Surplus + Gross Income + Taxes minus subsides and import.
The “employee compensation” refers to the salary and other non-monetary compensation for individuals while “gross operating surplus” are for businesses. The other “gross income” is for small businesses and the final part is very straightforward.
Expenditure Approach
This is the most popular method in determining GDP because it doesn’t only deal with the incomes, earnings and non-monetary compensation by business and individuals. The expenditure approach use the following formula:
GDP = Consumption + Gross Investment + Government Spending + (Export – Import)
The term “consumption” doesn’t only refer to the food and water used by individuals. Consumption also means the services individuals received from various sources. “Gross investment” is simply the investment made by private companies on the country. “Government spending” is a combination of acquisition of services and goods with providing services to the people. This is subtracted by the “transfer payment” such as welfare and other government benefits. These three components are added to the net export.
GDP vs. Standard of Living
GDP is often considered as the gauge or measurement of the actual economic setting of individuals. But the results or the numbers extracted from GDP only tell of the general economic setting. There is a possibility that the standard of living would greatly contrast the GDP.
The reason for this possibility is the existence of large corporations that are making huge annual profit. While they are earning millions every year, a simple office worker is compensated at a minimum wage. Individuals paid with minimum wage outnumber individuals earning millions. However, the earnings made by multi-billion companies can easily shadow the minimum age earnings. The final result of the GDP could be high but it could only mean that big businesses were able to post impressive earnings. The rest could drag the GDP down but there are too many businesses to have some significant affect.
Effects of GDP
Although GDP doesn’t necessarily paint the clear picture of general economic standing of the country, it does have some benefits. Among them is the increased spending of various investors foreign and domestic. Foreign companies will especially appreciate an increase in GDP because the country has proven they can develop economically and help businesses improve. This would have some repercussions on individuals as more work will come in. Additional improvements could also be felt as government will also receive taxes from employees and the foreign investor.
Individually, the effects of GDP are not really felt if the reason why GDP increased is due to big businesses. However, GDP will really have an effect on individuals if everyone received additional compensation or at least the spending increased as this is the signal that more people are receiving additional compensation.
GDP as Measuring Tool
Gross Domestic Product is also used by the government, economists, businesses and other individuals interested in this data as means to determine if the country did improve. The current GDP is often compared to the GDP in the past years. Since the output is adjusted to every situation, this data is very accurate in determining if there’s a general improvement on the country’s economy in terms of GDP. This data is also used by one country to compare its economy to another country. While this is often used for trivial purposes, it can show how a country could fare compared to other countries in terms of economy.
The GDP is a very interesting economic data used by business and governments. Although it does not necessarily mean economic progress in every situation, it has become a good selling point for countries who wanted to attract investors. It’s a data that shows business is improving which could possibly improve the way of life of the general population.