Explain What Is Meant By Gdp And How It Is Measured

1416 words - 6 pages

GDP is a way of quantifying the amount of activity in, and thus the size of, an economy. It is therefore a way of assessing the total worth of an economy and thus its total output. This is particularly relevant for assessing how an economy is growing (or contracting over time) and thus GDP measurements over a number of years can be very useful for assessing an economy's performance over that period, particularly in terms of the level of economic growth that it has experienced. It can also be used to compare the relative sizes of different economies, and it can be used to compare the relative economic performance therefore of different countries; especially when it is down-scaled to take account of a country's total population (GDP per capita) to give a fair comparison between countries.It is important to note that GDP only includes the total domestic production of an economy (as opposed to GNP which includes the total output of a country's businesses and people even if they are over-seas, even if their profit and investment is fully focused on the local economy). This is the output of the home economy of a country and thus excludes over-seas enterprises that may be taking place. In a world which is increasingly globalising and in which Trans-National countries are becoming increasingly important, this can be significant in some cases. For example Japan has many over-seas enterprises; particularly car-factories which often locate in the EU to produce cars for the EU there at a lower cost inside tax barriers imposed by the EU. However, these companies act somewhat as a drain to these EU economies and a boon to the Japanese economy as they send back considerable profits made to Japan to be used in further investment rather than directing money earned into the economy where the factory is located. In effect, consumer spending in the EU countries is still sent to the firms as expenditure for their services, but it is Japanese firms that the money is being sent to: it is foreign spending boosting the Japanese companies and thus indirectly their economy. These external monies earned over-seas are excluded from Japan's total GDP figures as they are not domestic output, but this over-seas output is still a significant output by Japanese companies which earns monies for usage in Japan. The inverse is also true: GDP includes foreign companies which have produced in a given country; even though goods used by the company may be imported and profits leaked from the country the company is in to the country the company is from.GNP minus GDP yields the net foreign factor income, which is the output represented by foreign activity. This number can be positive or negative depending on whether a country invests more over-seas or more over-seas countries invest in it. Sometimes, net foreign factor income is not significant because overseas profits and foreign profits made domestically may offset each other pretty well. But where much of a country's economic activity...

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