Gross domestic product, or GDP, is a measurement of both a country's aggregate output as well as its aggregate demand. It may be broken down into a variety of factors, all of which measure expenditure. It should be noted that although GDP is used as an indicator of economic size, it does not measure an individual's wealth or well-being.
Components of GDP
GDP is made up of four basic groups. The first three are types of expenditures: consumer expenditure, government expenditure and investment expenditure. The fourth component measures net exports. Net exports comprise both exports, which are items produced at home and bought by consumers overseas, and imports, which are goods produced by overseas companies but bought by domestic consumers. With the exemption of imports, an increase in every component leads to an increase in GDP. GDP is measured in one time period, usually in units of one year or quarters of a year.
Changes in Nominal GDP
GDP of a country can change due to fluctuations in price and demand/ The result may influence a country's progress. If GDP changes due to an increase in the level of production and not prices, then productivity is said to increase. However, if GDP increases due to an increase in price while production remains constant, then any increase is a result of inflation, not productivity. Such a change would not be reflected in real GDP. Alternatively, nominal GDP may change due to a combination of price and production change.
Limits of GDP as a Measure
GDP does not cover all aspects of production in an economy, and may also cover up some factors that may lead to long-term degradation. Production not included in GDP include household production, which is the cooking, cleaning and maintenance of homes. Although people tend not to get paid for such tasks, many economists argue that it is still an occupation that is not only a necessity but also requires substantial effort. GDP also does not cover aspects such as the environment, personal satisfaction, happiness and health quality. Many wealthy countries rank quite low in terms of personal happiness.
GDP vs. Per Capita GDP
If one country has a larger GDP than another country, it does not necessarily mean that it is richer. A larger GDP would certainly mean a larger output. However, the larger the population of a country, the more likely it will have an especially large GDP. For this reason, GDP per capita measures GDP per person. In most economies, this may be thought of as the average income. As a result, a country with a small GDP may still have a much larger GDP per capita than a country with a large population and a substantially larger GDP.