Why Gross Domestic Product (gdp) is so Important for Economies

GDP, gross domestic product, is the market value of all final goods and services in a nation during a period of time, usually one year. GNP, gross national product, is the market value of all final goods and services produced by all citizens of a nation during a one year period. Real GDP is the value of all final goods and services provided during a given time period based on the prices existing in a selected base year. Nominal GDP is GDP adjusted to inflation. Final goods are finished goods and services; while intermediate goods are goods and services used as an input for production of final goods (these aren’t counted in the GDP). Depreciation is when something loses it’s value over time. A recession is when a downturn in the business cycle during which real GDP declines and the unemployment rate rises.

Shortcomings of GDP include that GDP neglects leisure time, it does not include non-market transactions, it does not focus on distribution, kind, quality, or products, it does not include the underground economy, and it does not examine economic bads, such as pollution. It is advantageous to use GDP because it shows a country's economic growth and it takes consumption, investment, government expenditure, exports, and imports into account.

The income approach to calculating GDP adds compensation of employees plus rents plus profits plus net interest plus indirect taxes plus depreciation. The expenditure approach adds consumption, investment, government expenditure, as well as the nation’s exports minus the nation's imports.

The circular flow model is a diagram showing the exchange of money, products, and resources between households and businesses. Households exchange labor, land and capital for an income (wage). Businesses exchange costs for factors of production. The product market exchanges revenue for goods and services, while the product market exchanges goods and services for money from the households.

Offshoring is when a company moves its location abroad to produce its products. Outsourcing is when a company buys a product that it used to produce from a different company.

The employed people include anyone who works at least one hour a week for pay or fifteen hours a week as an unpaid worker in a family business. The unemployed people include anyone who is sixteen years or older actively seeking employment.

There are three types of unemployment; frictional, structural, and cyclical. Frictional unemployment is the normal search time required by workers with marketable skills who are changing jobs or re-entering the workforce. Structural unemployment is unemployment caused by a mismatch of the skills of workers out of work and the skills required for existing job opportunities. Cyclical unemployment is unemployment caused by the lack of jobs during a recession.

Leading indicators of variables that change before real GDP changes, such as average work week and unemployment claims. Coincident indicators are variables that change with real GDP, such as agricultural payroll and industrial production. Lagging indicators are variables that change after real GDP changes, such as unemployment rate.

The four stages of the business cycle include peaks, recession, trough, and expansion. A peak is when real GDP reaches its maximum after rising during a recovery. A recession is a downturn in the business cycle during which real GDP declines and the unemployment rate rises. A trough is when real GDP reaches its minimum after falling during a recession. An expansion is an upturn in the business cycle during which real GDP rises.

The unemployment rate is calculated by dividing the number of unemployed people by the number of people in the labor force and then multiplying by one hundred. The civilian labor force is people who are age sixteen or over who are employed or actively seeking a job, excluding armed forces, homemakers, discouraged workers, and other people not in the work force.