A lot of us have heard of the term GDP, especially toward the end of official year, but probably don't pay much attention to it. But to economists, businessmen, firms as well as governments, GDP is one of the most important tool used to reflect how a country do not only in economic but also in social and political perspectives. But what is GDP? What are its components? Why is it so important? And if GDP is that important and necessary, why are there still controversies against it?
"GDP or Gross Domestic Product is defined as the total value of final goods and services produced within a country's border during a specific period, usually a year." The phrase "produced within a country's border" distinguishes GDP from other measurements of economy. For example, GNP (Gross National Product) is really close to GDP but it also includes the inter - country income transfer, that means if a firm has international subsidiaries and these subsidiaries make profit, their profit is going to be counted in GNP, not in GDP. Moreover, "final good and services" stresses that only finished goods which are transferred directly to final consumers are counted in GDP, other than that, they are considered as intermediate good because if they are included, their output value would be counted more than once that leads to the excessively large GDP. For example, when Pepsi purchases plastic bottles for packaging, the plastic bottles are considered as intermediate goods because Pepsi doesn't keep the bottles to itself, it buys them in order to resell to consumers.
There are two approaches to GDP, which are nominal GDP, and real GDP. Nominal GDP (or GDP current dollar) is "the total amount of money sp...
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...nd to work more than ever. In addition, GDP takes into account of activities that actually produces no net change. For instance, the twin hurricanes Katrina and Rita had destroyed many homes and put out a lot of business in the regions of Georgia, Louisiana. But none of these damages are included in GDP but the reconstruction as well as clean up activities would account a great increase in GDP. According to BEA's report, the GDP in the third quarter of 2005 is 3.8% comparing to 3.3% of the second quarter and 1.1% of the fourth quarter, when the reconstruction work for the two hurricanes played an important role in the increase.
Nothing is perfect, it also applies to GDP, but as long as there is no other better method to measure an economic growth. GDP is still going to be the most important measurement that people look up to as an indicator to gear the economy.
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