Know What GDP Is
(Gross Domestic Product) at The Financial Conference
GDP is an indicator that tries to measure the wealth generated by a country during a year or during a given study period. You can start from scratch on January 1 to account for the goods and services produced in that country, and on December 31 stop accounting. We must bear in mind that GDP, when trying to use it as an indicator of economic growth or development, is missing important data, such as:
– The goods and services generated by the submerged economies, understanding these as the exchange of goods that is not registered, that is, they are unknown by the institutions, so the state remains beyond their control and can not be accounted for. For example, if a plumber performs “extra” tasks, without a legal invoice, outside his company, at a particular level and receives money for it, an economic transaction is being made but it is not registered and the state is beyond his control.
– The GDP does not measure the natural resources of a country, its hospitals, schools, the state of its environment, which for certain productive activities can be seriously damaged, etc. A country can excessively exploit its natural resources, it can increase its GDP, but in reality it is impoverishing its country leaving less wealth to future generations. So we would be facing a sustained growth in which positive growth rates would be achieved, but it would not be sustainable growth, because future generations would find an impoverished country. The problem is that GDP does not distinguish between sustained growth and sustainable growth that would be ideal. A country may also be governed by a policy that excessively exploits its workers,
– The GDP of a country is alien to whether the distribution of growth among its inhabitants is fair or not. A country may have a high GDP, but the wealth may be only a few, to the detriment of many. It can not be said then that this country enjoys great wellbeing because there is no adequate distribution of growth, so there is no general increase in the standard of living in that country.
– External indebtedness. A country can apply for loans abroad, so in a study period it will increase its GDP, although in later periods of GDP study it will decrease.
– The GDP does not measure non-renumerated jobs carried out by non-profit organizations, volunteers, the immense work done by people who are exclusively dedicated to the care of their home, the money received as pensions … and ultimately all those activities that generate well-being but not being economic transactions in which an exchange of goods takes place are not accounted for in the GDP.
For all these and other reasons, it is said that GDP “tries” to measure the growth, development or wealth generated by a country during a period of study; measures it, but taking into account these and other nuances. But let’s go to his detailed study.
GDP of a country is defined as the sum of all goods and services with finality that have been produced in that country for a year by nationals or foreigners residing in the country.
We will define the words indicated in bold for a better understanding.
Goods and services : car, washing machine, food, visit to the dentist, magazine, computer …
With final character : Imagine for the 2018 Conference that you’re in charge of coordinating the corporate entertainment. Now imagine that the handkerchief of the magician cost 100 dollars, and that entire magician’s tuxedo costs 8,000 dollars. The handkerchief will not be included in the GDP, because it is the tuxedo (well with final character) that is included in the GDP and in its price, the value of the handkerchief is already accounted for.
Nationals or by resident foreigners . The goods and services produced by the people residing in the country, whether national or foreign, but not those generated by a person who is from the country in question but lives abroad, would be accounted for.
Produced during a year: If a new van is sold, in that year its price will be included in the GDP, when the owner sells it another year, the price of the second sale in the GDP of that year will not be included, because it is a Well, the year of its first sale was counted.
We can understand GDP from two points of view:
a) GDP as a magnitude of expenditure flow.
b) GDP as a magnitude of income flow.
GDP As a magnitude of expenditure flow.
This would be the formula: GDP = C + I + G + X – I
C (Consumption): would be the goods and services that have been produced and consumed by the residents of that country for a year.
I (Investment): it would be those goods and services that companies incorporate to their companies to take advantage of them and obtain benefits with them, that is, to invest; for example introduce new machinery.
G (Spending): we talk about the money that the Public Administration spends, for example the salaries of the civil servants, the expense in material for its proper functioning, to build new schools, etc.
X (Exports): Goods and services sold abroad.
I (Imports): Goods and services purchased abroad.
GDP as a magnitude of income flow.
Here we summarize the income generated during one year. Your formula would be the following:
GDP = Salaries. (RA) + Rentals + Interest + (Ti – Sub) + Depreciation. + Benefits.
RA (Renumberings to employees). The salary of the workers.
Rentals + Interest: Earnings obtained by property owners with their loan.
(Ti – Sub): The amounts received by the State for taxes less the subsidies offered.
Depreciation: The rent offered to compensate companies for the wear of the products used.
Benefits: remuneration obtained by the owners of the companies.
Nominal GDP and real GDP
Nominal GDP is the sum of the quantities of final goods and services produced in a country during a certain period of time. So far nothing new, but if we compare the nominal GDP of one year with the nominal GDP of another year in the same country, the existing variations could not be due to a growth or a decrease in GDP because there is a variation in prices. Here comes into play the real GDP, which would be the sum of the quantities of the final goods and services produced in a country during a certain period of time at constant prices. Real GDP removes the variation of prices.
Real GDP is equal to nominal GDP divided by the GDP deflator, that is:
Real GDP = Nominal GDP / GDP deflator.
But what is the GDP deflator? It is an index that informs us of the variation of prices in goods and services produced in a given period. If an item costs 200 euros and then costs 217 euros, the article has suffered the variation of 217/200 = 1,085.
Let’s see an example to understand both concepts:
We will calculate the growth of nominal GDP and real GDP of a country.
A country has a GDP of 100,000 euros in 2006 and a GDP of 120,000 in 2007. The prices in 2007 have suffered an increase of 7%. Now let’s calculate the growth of nominal GDP and real GDP.
If prices have increased by 7%, it means that 100 in 2006 are 107 in 2007.
The division between the price of 2006 divided by the price of 2007, will be the GDP deflator.
GDP deflator = 107/100 = 1.07
We have said that real GDP is the division between nominal GDP and the GDP deflator, therefore:
Real GDP (2007) = 120,000 / 1.07 = 112,149.53 euros.
The nominal GDP growth is: 120,000 / 100,000 20%
The real GDP growth is: 112,149.53 / 100,000, 12.15%
Gross National Product (GNP)
The GNP (Gross National Product) would be the goods and services produced by the nationals of a country, residing in the same country or in another.
Net Domestic Product (PIN)
The PIN (Net Domestic Product) It is the gross domestic product, the GDP, but removing the loss of value or wear that the productive team has suffered during the study period. To understand this concept let’s see an example:
A country has a GDP of 200,000 euros in 2006, but its production equipment (machines, infrastructure, and ultimately all the elements destined to produce, have suffered a loss of value due to attrition of 25,000 euros. What would your PIN be? Very easy PIN = GDP – wear = 200,000 – 25,000 = 175,000 euros.
Net National Product (PNN)
The PNN (Net National Product) would be the GNP, that is, the goods and services produced by the nationals of a country, residing in the same country or in another, but taking away the losses of value that the production team has suffered.
GDP per capita
The per capita GDP that is also known as per capita income and per capita income is an index that tells us about the material wealth available. It is the division of GDP divided by the number of inhabitants. That is to say how much each inhabitant of a country of its GDP touches. This can serve as an approximation to compare the difference in welfare that may exist between the inhabitants of one country or another.
With the data published by Eurostat, the EU countries would have the following GDP per capita in 2006. The percentage is related to the average, for example, Spain has a percentage of 102% with respect to the average, that is, it exceeds the half. So UE-27 = 100. The highest GDP per capita with 280% of the average is Luxembourg. EU-25 are the countries of the European Union without Bulgaria and Romania which are the last two that entered, precisely those that have lower GDP per capita.
UE-27 = 100 Spain = 102 UE-25 = 104
In the following data and graph we can see the evolution of the interannual rate of the Gross Domestic Product of Spain.
In the first quarter of 2007, GDP grew by 4.1% and in the second quarter by 4%, that is one tenth less than in the previous quarter, although it exceeded by three tenths the value reached in the same period of the previous year, this shows a tenuous profile of slowdown in the growth of the Spanish economy
Euribor August 18, 2007Readings: 2495
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