Gross Domestic Product is the total sum of all the final goods and services produced within a country’s borders over any period of time, usually annually or quarterly.
It is one of the most significant measures to calculate the country’s economic condition and performance in terms of accounting.
What is GDP?
GDP per capita is Gross Domestic Product per capita, it refers to the average output of the economy per every individual living in the population.
It is usually expressed in U.S. dollars or in local currency and is one of the most significant indexes for estimation of economic performance and comparison of living standards between countries.
However, it has some drawbacks: personal income cannot be measured by this index, and income distribution across the territory of the country also cannot be identified.
Second, the use of the dollar as a base for international comparisons position through changes in exchange rates that do not reflect the same level of local purchasing power.
Despite such disadvantages, it has remained the most well-established measure for determining economic well-being.
Calculating GDP per capita can be highly relevant to businesses for several strong reasons: they create investment opportunities.
History
The concept of GDP was first proposed in 1937 by economist Simon Kuznets. He gave measures for assessing the health of the economy in his report to the U.S. Congress during the Great Depression.
Before the emergence of GDP, Gross National Product (GNP) was primarily used as a measure.
After the Bretton Woods conference in 1944, GDP became the standard measure for national economies but the United States was still using GNP as its measure until 1991 when it switched to using GDP.
By the 1950s, however, a few economists began questioning whether GDP was a fully absolute measure of success because it did not account for elements such as health, happiness, and equality.
There are three methods of calculating the GDP
1)the expenditures approach: sum of total expenditure on goods and services,
2)the production approach:total production,
3) the income approach: total income generated by production factors.
The key area concerning a business is looking to extend its activities overseas or invest in specific economies, thus signifies that greater values for GDP per capita implies that there exists a wealthier market to tap into.
therefore being attractive for the luxury goods business or premium services business, and also forecasted growth for GDP per capita can represent future business opportunities within that economy.
Country Risk Assessment
GDP per capita is an index of the economic well-being and the consumer situation within a market. The information can then be utilized by enterprises in assessing economic risks of recession or consumer limitation in spending, thus offering better-informed decisions.
Consumer Insight
GDP per capita generally follows the pattern of consumer spending, it acts as a good predictor in the demand for luxury consumption goods and services.
According to the pattern of GDP per capita observed in any country, the companies can predict more effectively what consumers will buy and, after such an understanding through such awareness, create more effective products and even modify promotional strategies according to changing consumer tastes.
Types of GDP
Gross Domestic Product can be measured in many dimensions and gives absolutely different information about economic performance.
Nominal Gross Domestic Product
It measures the economic production in a country at current prices net of inflation. It means that all goods and services within a particular year are valued at the prices at which they were sold, showing the financial output of the economy during that period.
Nominal GDP is useful when comparing quarterly outputs in a single year as it reflects the actual market prices prevailing during that time.
But making a comparison between the GDP over several consecutive years, nominal GDP is misleading because it records variations in price levels that could not necessarily suggest an increase in production.
Real GDP
is adjusted by the effect of inflation and it reflects the country’s economic output in constant base-year prices.
More precisely, an increase in the country’s real GDP means that the comparison for different years makes sense because it removes the effect of rising prices.
It gives a clearer view of the growth of the economy by projecting only on the volume of production instead of the price itself.
For instance, if the prices have increased by 5% relative to the base year, then real GDP is calculated as nominal GDP divided by the deflator 1.05, already accounting for inflation.
Comparing real and nominal GDP lets economists know whether growth in nominal or real GDP arises from expanded production or inflation.
Real and nominal GDP are useful in comparing each of them to enable economists to answer this question. A large difference between real and nominal GDP may be a good indicator of significant inflation or deflation within an economy.
Generally, nominal GDP will be greater than real GDP because inflation increases prices over time. Real GDP enables the economist to track true economic growth by subtracting changes in production from changes in price to provide a more relevant year-over-year comparison.
GDP has various limitations
it fails to account for income distribution or wealth effect and environmental damage, but it remains one of the most important indicators of the evaluation and for comparing countries with one another at different points in time.
Among the several limitations in using the GDP as an economic indicator, some of the indicators are quite notable.
It excludes all the informal economic activity since it automatically excludes unrecorded transactions, underground markets, unpaid work, which also includes volunteer efforts, and household production.
For a world economy, it is geographically limited because a part of the profits made by overseas companies is sent back to foreign investors, thus over-estimating economic output.
GDP focuses on only material output without measuring the welfare of citizens, environmental impacts, or income inequality.
Moreover, it only measures final goods and investments, it fails to measure intermediate business transactions between businesses that often raise the importance of consumption over production.
And GDP counts all expenditures—be it productive or wasteful—because they are all used means of economic benefits, such as costs involved in useless or destructive activities, including lobbying, unnecessary constructions, and war-related expenses