Importance of Gross Domestic Product

Posted: October 17th, 2013

Importance of Gross Domestic Product

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Importance of Gross Domestic Product

GDP (Gross Domestic Product) is the quantifying in monetary value of all goods and services produced within the boundaries of a nation over a specified period of time usually a year. As a result, GDP is distinguished from GNP where the later considers nationality of producers regardless of location or boundaries. Its important to note only newly produced goods as well as within the county’s boundaries are measured within the agreed amount of time. There are three approaches used to measure GDP distinguished by point of assess. The spending or expenditure method measures the amount of money individuals spend on goods and services produced in a specific country. The second method known as income approach measures the income of good and service producers within a country where as the final method referred to as production method enumerates value of goods and services at point of production or export (Baumol et al. 2012).

GDP figures are paramount for national economies due to planning purposes. GDP comprises contributions made by different economic sectors such as industrial, mining, agricultural or even tourism. The government acquires information illustrating the production levels of different sectors and is determine sectors requiring more investment capital or efficiency in management. Additionally, the government institutions responsible for economic affairs of a nation can gauge the economic growth registered by different sectors as well as identify contributing factors. World monetary institutions responsible for funding as well as bailouts use the GDP to measure the economic soundness while predicting growth and required investment capital for different countries. Overall, the GDP is indicative of the effects of macro-economic policies employed by the government in addition to being used to calculate other macro-economic factors such as per capital income and standard of living (Baumol et al. 2012). Lastly, GDP is a vital indicator in identifying the economic trade cycle phases in a country.

References

Baumol, W. J., & Blinder, A. S. (2012). Economics: Principles and policy. Mason, OH: South-Western Cengage Learning.