 # What is GDP?

In the 21st century, we hear economic news through the media every day. That is why the concept of GDP, if it is not known to us, then, at least, is often heard.

But what does it mean? What is GDP?and why modern science is so closely watching this indicator? These are the questions we will answer in this article.

GDP or (gross domestic product) is the value of all goods and services produced by a country in all sectors of the economy in the state.

An interesting fact is that for the first time this concept was proposed in 1934 by American economist Simon Kuznets, who subsequently won the Nobel Prize.

For domestic calculations, GDP is expressed in national currency, and for international analysis - in dollars.

## What is GDP in simple words

To understand what GDP is, we give a simple example. Let's calculate the GDP for the imaginary Petrov family, which consists of a father, mother and child.

Suppose that in 2015 the total income of Petrovs amounted to 900 thousand rubles, and in 2016 - 1 million rubles.

At first glance, it seems that family income increased by 100 thousand. However, the economy is not such a simple thing.

Let us deal with the situation in more detail, and immediately say that economists distinguish three types of GDP.

## Nominal GDP

Nominal GDP is easy to calculate, since it operates on numbers without taking inflation into account. According to this nominal indicator, the income level of the Petrov family grew by 11.1%.

So, formally, we can assume that our imaginary friends in 2016 began to live better by 11.1%. But here it should be remembered that in 2016 prices also increased.

Therefore, it is necessary to turn to the next type of GDP - real.

## Real GDP

As you already understood, real GDP differs from nominal GDP in that it takes into account inflation. We know that in 2016 inflation was 11.4%.

Now we will make a small calculation: 11.1% - 11.4 = -0.3%. It turns out that the real GDP of the Ivanov family did not grow in 2016, but on the contrary fell to -0.3%.

And this is despite the fact that the amount of money has increased.

## GDP per capita

Finally, we come to finding out what GDP is per capita. It is quite simple to do this: it is necessary to divide the GDP indicator by the number of the country's population.

Again, turn to our virtual family. In 2015, GDP per capita in the Ivanov family was 900,000 / 3 = 300,000, and next year - 1 million / 3 = 333,333.

By the way, you may be interested in an article about what is purchasing power parity. Be sure to read.

In the end, it should only be added that there are 3 methods for calculating GDP: by income, by expenditure, by value added. Of course, we will not consider all of them, but we hope that you have understood the essence.

## Criticism of GDP

It is important to emphasize that GDP is a very specific economic tool. According to this indicator alone, it is impossible to objectively assess the level of welfare of a country.

In connection with the criticism of GDP after the start of its use, a number of alternative indicators were proposed, designed to eliminate the shortcomings inherent in GDP.

Well, now you have the concept of what is GDP. In simple words, we tried to describe this concept and give illustrative examples.

By the way, if you do not know what the human development index is, be sure to get acquainted with this concept. We also recommend reading interesting facts about money.