Theory of economics

2. Why real GDP is used to measure Growth and National Wealth
GDP can be expressed in two different ways—nominal and real GDP. Nominal GDP takes current market prices into account without factoring in inflation or deflation. This figure looks at the natural movement of prices and tracks the gradual increase of an economy's value over time.This is in contrast to real GDP which does factor in inflation or the overall rise in of price levels. Economists generally prefer using real GDP as a way to compare a country's economic growth rate. It is calculated using a price deflator—the difference in prices between the current and base year, which is the reference year. This is how economists can tell whether there is any real growth between one year and the next.

As one can imagine, both economic production and growth–which GDP represents–have a large impact on nearly everyone within that economy. For example, when the economy is healthy, there will typically be low unemployment and wage increases as businesses demand labor to meet the growing economy. Economists look at positive GDP growth to determine how much an economy is flourishing. Conversely, they can use negative GDP growth to determine whether the economy is in a recession.

A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It is not difficult to understand why—a bad economy usually means lower earnings for companies. This, in turn, translates into lower stock prices. Investors often pay attention to both positive and negative GDP growth when assessing an investment idea or devising with an investment strategy. But keep in mind, because GDP is a measurement of the economy in the previous quarter or year, it can help explain how it has affected stocks and your investments. It should not, therefore, be used as a means to predict how the market will move.

Gross Domestic Product represents the economic production and growth of a nation and is one of the primary indicators used to determine the overall well-being of a country’s economy and standard of living. One way to determine how well a country’s economy is flourishing is by its GDP growth rate. This rate reflects the increase or decrease in the percentage of economic output in monthly, quarterly, or yearly periods.Gross Domestic Product enables economic policymakers to assess whether the economy is weakening or progressing, if it needs improvements or restrictions, and if threats of recession or inflation are imminent. From these assessments, government agencies can determine if expansionary, monetary policies are needed to address economic issues.Investors place important on GDP growth rates to decide how the economy is changing so that they can make adjustments to their asset allocation.

However, when there is an economic slump, businesses experience low profits, which means lower stock prices and consumers tend to cut spending. Investors are also on the lookout for potential investments, locally and abroad, basing their judgment on countries’ growth rate comparisons.The total amount that the economy is producing and consuming is important to track over time. It is a key indicator of the overall health and growth of the economy, and it is used to determine economic policy going forward.For example, the Federal Reserve factors real GDP as well as the rate of inflation into its decisions on influencing the money supply.In inflationary periods, real GDP will be lower than nominal GDP. In deflationary times, real GDP will be higher.These decisions affect the entire economy. If real GDP growth is low or negative, the Federal Reserve may lower fund rates to boost business investment and consumer borrowing.

Both versions of the GDP number are estimates of the value of all the finished goods and services produced by the nation's economy during a given period. They include totals for consumer spending business spending, government purchasing, and exports. Total imports are subtracted from the GDP number.Some spending is not included in GDP. Sales of raw materials, sales of stocks and bonds, and government entitlement payments such as Social Security are excluded, as are sales of used goods and the value of volunteer services.

The size of a country's economy is sorted by the nominal value of GDP, calculated at the market or official government rates of financial and statistical institutions.

Net Gross National Income is the gross national product excluding depreciation.

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  GDP – amortization = Net National Income
  

Net national income - indirect taxes = National Income

National Income include:

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  national income generated
  
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  used national income
  

GDP is a tool to help determine the economic development of countries per capita. The factors of GDP per capita cannot be clearly stated, as the nature of growth depends on several factors. For example, the quality of each product that plays an important role in production, the raw materials used for each product, and the amount of electricity consumed. All these indicators are compared to the international currency - the US dollar, so as not to contradict each other. Methods of conversion from the national currency to the dollar were performed by the exchange rate exchange market.

GDP is important because it gives information about the size of the economy and how an economy is performing. The growth rate of real GDP is often used as an indicator of the general health of the economy. In broad terms, an increase in real GDP is interpreted as a sign that the economy is doing well.

Economic growth, measured popularly via GDP, is a complementary indicator to development, but not an adequate indicator when considered on its own. The challenge of modern capitalism is to balance its role as an efficient and effective mode of production with its tendency to concentrate income, wealth and, thus, power.