What's GDP(Gross Domestic Product) in economic terms?

Question

Also RPI (weighted price index) can u please explain these 2 in an easy language?
Thank You

Answer 1

GDP is what's produced in a country.

It's usually measured for calendar quarters (Jan-Mar etc) in rich countries and annually in poor ones.

There's three ways of measuring it. One is to measure expenditure as given by answer #2: consumption plus investment plus net exports. Just in case you don't know, consumption is when the people and businesses of the country spend their disposable income on things that are don't basically last long (that's most of what you and me buy), and what the government spends on the same kinds of things. Investment is what we spend on things that we'll get benefits from for years. Investment by ordinary people means purchases of durable goods like sofas. Investment by business means purchases of things like machinery and computers and software. Investment by government is like business investment and also includes things like warships.... anything with a long lifespan.

The second way to measure GDP is to measure income: wages and salaries plus profits plus net interest earned from savings. The third way is to measure output. They should add up to the same total. Of course in reality they don't quite, not even govt stats offices can count everything we do and get it spot on.

RPI, retail price index, is the UK term for what elsewhere is the "consumer price index". Basically, the government samples us all to find out what specific items we spend our money on, and their statisticians use that info to make a list of all the expenses that are large enough in the country as a whole to matter. Then they weight the list in proportion to how much we spend. And then they measure every month how the prices of those items change.

I'll give you an imaginary example to show how it works. Hope your eyes don't glaze over at arithmetic. I'll be taking as given, for example, that you know that 10% of 4 is 0.4.
Now let's say (just to keep it simple for illustration only, I'm not trying to be accurate) the UK population as a whole spend 4% of our income on air fares, 1% on bus fares, 0.5% on fresh bananas, 0.5% on ipods. Hold aside the other 94% for the moment. Now let's imagine that between January 2006 and Jan 07 the average price of ipods halves, the average price of air fares falls by 10%, bus fares rise by 10%, and bananas go up by 50%. The halving of ipod prices is nice, but the much smaller fall, 10%, in air fares is actually more important to most people. That's why they weight the index. On a "base of Jan 06 = 100" which means that prices in Jan 06 of all items in the index are mathematically made to add up to 100 (notional units), air fares count as 4.0, bus fares as 1.0 and so on. In Jan 07, air fares have dropped from 4.0 to 3.6. Ipods have dropped from 0.5 to 0.25. Bus fares have risen from 1.0 to 1.1. Bananas have risen from 0.5 to 0.75. (I hope you're with me this far :-) ) The four items taken together have changed from 6.0 out of 100 to 5.7. (0.25+0.75+3.6+1.1) If everything else has stayed at the same price (adding up to a weighted count of 94) then the overall retail price index has gone down from 100 to 99.7 (94+5.7) and the 1-year rate of inflation is minus 0.3%.

Chances are your either struggling with this or really engaging with it. Some people who love this kind of thing get to be paid for it. They work for the government statistics office.

Answer 2

GDP refers to, in a larger sense, to the sum of all of the production generated by a society, usually in a year. What that means is that the total output generated by a country, any country, is added up and then a nice round figure is given. More specifically, you have to add up all of the goods and services produced, but you also need to deduct the goods that have already been produced. This is a little tricky because there are goods and services that were produced in previous years, but they weren't used until this year, so naturally, that was already accounted for in the past. Thus, you need to subtract it from this year's accounts.

As far as the weighted price index, remember that the GDP is relative beacause of inflation. On year may seem a lot better than previous years because apparently, due to higher prices, your production has gone up. However, that's not true. So, a set of stats has to be created in order to have equivalencies from one year to another. So what some countries do is develop a system where prices are sort of averaged based on one particular year, and then the production is measured using this base price.

For example, oil is pegged at $60 a barrel. So this price will serve a base over the next 10 years, regardless of the behaviour of it's real price on the open market. Thus, if in 2006 the total output of oil was 100, and then in 2007, the total output was 95, you'd see a decrease in the dollar amount that was generated as part of the oil industry in a given country.

Hope this helps.

Answer 3

Consumption + Investment + Government Spending + Net Exports

Answer 4

Y = G +I+C+NX Y is GDP 100x ( Y2-Y1)/Y1 is % Growth. I is development because it is Investment. Developed :- Industrialized, High Y, stable Growth, low I. Developing :- semi-industrialized, medium Y, high ( but volatile) Growth, ( preferably)high I.