GDP is known as the acronym for “Gross Domestic Product,” is the monetary value of all goods and services produced in a given region during a given period, usually one year.
The GDP is one of the most used indicators in the macroeconomy since its main objective is to measure economic activity, taking into account only the goods and services produced within the formal economy of a given territory regardless of the origin of the companies, excluding everything that occurs in the context of the informal economy, or illegal business.
Nominal GDP, Real GDP, and GDP Per Capita
To analyze the behavior of a country’s GDP, it is necessary to differentiate nominal GDP, real GDP and GDP per capita.
The nominal GDP is characterized by the value at the market or current prices of the goods and services produced in a given time.
When it is indicated that current prices are taken into account, they are those that are established in the goods and services at the time of determining the GDP, which are often affected by inflation or deflation. In this context, experts suggest taking Real GDP counts.
Real GDP is calculated by the constant price of final goods and services produced in a country.
Constant prices are calculated from a base – year that eliminates the changes that arise in prices as a result of inflation or deflation.
GDP per capita is the division of GDP by the number of inhabitants of a country. The respective indicator as a measure of social welfare or quality of life of the inhabitants that make up a country is strongly criticized because it ignores the economic inequalities that exist between the inhabitants since it attributes the same level of income to all.
Calculation of GDP
GDP is calculated as the flow of expenses or income flow. In the first case, the following indicators are taken into account:
- The consumption of goods and services acquired by family and businesses.
- Investment, especially by companies.
- Public expenditure acquired by the Public Administration; in this context, the salaries of public officials are also included.
- The result of exports – imports.
However, as income distribution, it is taken into account: salaries, rents, taxes (VAT, income received by the State), benefits received by the owners of the company, and depreciation.
In relation to the results that may arise in the calculation of GDP, if the GDP of a country increases, it indicates an increase in the production of a country, as well as an increase in economic investment.
Also, a GDP growth represents income for the government through taxes; therefore, the role of the State in the economic strengthening of a country and providing security and conditions for the investment of new businesses and growth is of the paramount importance of the existing ones.
How GDP Affects You
GDP impacts personal finance, investments, and job growth. Investors look at a nations’ growth rate to decide if they should adjust their asset allocation. They also compare country growth rates to find their best international opportunities.
They purchase shares of companies that are in rapidly growing countries. The U.S. central bank, the Federal Reserve, uses the growth rate to determine monetary policy. It implements expansionary monetary policy to ward off recession and contractionary monetary policy to prevent inflation. Its primary tool is the federal funds rate.
For example, if the growth rate is increasing then the Fed raises interest rates to stem inflation. In this case, you should lock in a fixed-rate mortgage. Your payments on an adjustable-rate mortgage will rise along with the fed funds rate.
If growth slows or becomes negative, then you should update your resume. Slow economic growth leads to layoffs and unemployment. That can take several months. It takes time for executives to compile the layoff list and prepare exit packages.