Economics World Bank Questions Medium
Gross Domestic Product (GDP) is a measure of the total value of all goods and services produced within a country's borders during a specific period, usually a year. It is used as an indicator of the economic health and size of a country's economy.
GDP can be calculated using three different approaches: the production approach, the income approach, and the expenditure approach.
1. Production Approach: This approach calculates GDP by summing up the value added at each stage of production. It considers the value of all final goods and services produced within the country's borders. Value added is the difference between the value of a firm's output and the value of the intermediate inputs used in the production process.
2. Income Approach: This approach calculates GDP by summing up all the incomes earned by individuals and businesses within the country. It includes wages, salaries, profits, rents, and interest. This approach focuses on the distribution of income generated by the production process.
3. Expenditure Approach: This approach calculates GDP by summing up all the expenditures made on final goods and services within the country. It includes consumption expenditure by households, investment expenditure by businesses, government expenditure on goods and services, and net exports (exports minus imports).
All three approaches should yield the same GDP figure, as they are different ways of measuring the same economic activity. However, in practice, there might be slight discrepancies due to data limitations and statistical errors.
GDP is an important measure as it provides insights into the overall economic performance of a country, helps in comparing the economic growth between countries, and serves as a basis for policy-making and economic planning.