It is a good idea for each of us to assess our financial situation from time to time, whether at the end of each year or when filing our tax return. The GDP system or Gross domestic product system is one of the important statistics that is used to assess the financial situation. All governments in different countries make the same statistics using the GDP system, which gives them a more comprehensive view of the movement of money and savings as well as investments. In this article, we will show you all the details about the GDP system and how it is calculated and all we will show you what the purchasing power parity of GDP (PPP) is.
What is GDP?
The GDP system is the most prominent and important statistics that governments, international agencies and economists rely on as a measure of economic growth performance.
Gross domestic product is the total value of all final goods and services that you produce within a country’s borders. Therefore, the GDP system represents the economic performance card for any country.
Through the GDP system we can know the financial situation as well as assess the movement of money and savings as well as investments.
How to Calculate GDP
As for the method of calculating the gross domestic product or the GDP system, there is more than one way to calculate it, through more than one methodology.
The most important of them are the expenditure methodology, the production methodology, and the income methodology.
When calculating each of them correctly, it should give the same result. Here are the most important ways to calculate GDP:
1. Calculating GDP by Expenditure Methodology
The expenditure methodology is based on accounting for all purchases of the major groups involved in the economy.
GDP system by this methodology is calculated as:
GDP = C + G + I + NX
- C = Consumer expenditure includes money used to purchase all goods and services.
- G = Government spending, the money the government spends on employee salaries, equipment, and infrastructure such as roads, sewers, power grids, and airports.
- I = investment expenditures, also known as capital expenditures, it includes expenditures by companies on purchasing equipment, building factories, or generally investing in their businesses.
- NX = net exports, it is the net value of all goods and services that a country exports to other countries. Its value can be positive or negative in GDP.
2. Calculating GDP by production methodology
The production methodology differs from the expenditure methodology in calculating GDP system, in that instead of calculating all the expenses that go into the economy. It estimates the total value of a country’s economic output after deducting the costs of production inputs.
3. Calculating GDP system by Income Methodology
Income methodology is based on the view that one person’s spending is another person’s income and. Therefore, that money earned by all activities that go into the economy must be added.
The importance of Gross domestic product GDP system
The GDP system is of great importance, as it provides evidence of an economy’s capacity in a clear number that is easy to compare from year to year and country to country.
The main value of GDP is the best way to compare the economies of countries, and here are a number of points that show you the importance of the GDP system:
- Giving a comprehensive picture of the state of the economy.
- Empowering policy makers and central banks to judge whether the economy is shrinking or expanding, and whether it needs to be boosted or curbed.
- Recognize if there are threats such as recession or inflation.
- Allow policy makers, economists, and business people to analyze the impact of variables such as monetary and fiscal policy and economic shocks.
- Contribute to significantly reducing the severity of business cycles since the end of World War II.
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GDP Purchasing Power Parity (PPP)
Purchasing power parity is a method used to measure the exchange rate equilibrium between two currencies and to equalize it.
It can be relied upon to compare the GDP between two countries to avoid any bias. Therefore, some countries are adjusting their GDP system figures to reflect purchasing power parity.
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