Macroeconomics the Gross Domestic Product

Macroeconomics

The Gross Domestic Product (GDP) is considered one of the most significant and widely used measures of economic prosperity. Indeed, many nations from across the world actively utilize this economic tool to gauge the health of their national economies. In this text, I will concern myself with Gross Domestic Product and its relevance to national economies.

Gross Domestic Product (GDP)

According to Sexton (2010), "Gross Domestic Product is the measure of economic performance based on the value of all final goods and services produced within a country during a given period." According to the author, the period of time captured during the computation of GDP is usually one year. Basically, by computing an economy's GDP, nations are able to measure two things at the same time i.e. total expenditures and total income. In this case, total expenditures are represented by the value of total production. On the other hand, because every single dollar spent by the consumer is essentially a dollar of income for a given seller, the computation of GDP is also used to determine the total income value. Hence in simple terms, the total spending or expenditures must be equal to the total income.

The Importance of GDP to National Economies

It can be noted that as a widely used measure of economic activity, the relevance of GDP for national economies cannot be overstated. According to Sexton (2010), GDP is indeed the only measure of economic performance in aggregate terms that gets the most attention in the media. To begin with, national economies can use GDP to determine or study their economic growth rates. For instance, an increase in GDP over a given period of time is an indicator of a nation heading towards economic prosperity. On the other hand, a sustained decrease in GDP or stagnation of the same is an indicator of an economy on the decline.

Secondly, figures derived from the computation of GDP can be used as a basis for devising ways of tackling inflation and deflation. For instance, it is possible to determine the increase or decrease in the general price levels by looking at the national income figures. National economies can use national income figures to determine how much income individuals are spending on consumption goods and hence their levels of saving. With such information, national governments can come up with ways of keeping inflation and deflation in check based on investment, saving and consumption figures.

Third, national economies can determine the economic positions of their countries through a comparison of their GDPs with those of other nations. If a nation's GDP is significantly lower in comparison to that of other nations, it becomes clear to policy makers that the standards of living of individuals in such an economy could be low. Further, GDP figures in this case can be used to determine the purchasing power of individuals. If the GDP results in this case present a not so appealing scenario, then appropriate measures can be undertaken so as to remedy the situation.