What is GDP?
The GDP or Gross Domestic Product calculates the economic value of all produced goods and services generated by the country in a specific time period – monthly, quarterly or annually. GDP is an accurate indication of an economy’s size, while GDP per capita has a close equivalence with the trend in living standards over time, and the GDP growth rate is probably the single best indicator of economic growth.
GDP in a country is usually calculated by the national statistics agency, which compiles the information from a large number of sources. Most countries follow established international standards in calculating the GDP.
Importance of GDP
One important thing to know is whether the total output of goods and services is growing or shrinking. But because GDP is collected at current or nominal prices, one cannot compare two periods without making adjustments for inflation. To determine the “real” GDP, its nominal value must be adjusted to take into account price changes to allow us to see whether the value of output has gone up because more is being produced or simply because prices have increased.
GDP is important because it informs about the size of the economy and how an economy is performing. In broad terms, an increase in real GDP is interpreted as a sign that an economy is doing well. When “real” GDP is growing firmly, employment is likely to be increasing as companies hire more people for their factories and they have more money in their pockets. When GDP is shrinking, employment often declines.
There are cases wherein GDP may be growing, but not fast enough to create sufficient number of jobs for those who seek them. But real GDP growth does move in cycles over time. Economies are sometimes in periods of boom, and sometimes even in periods of recession.