Gross Domestic Product (GDP) is one of the most widely used measures of an economy’s output or production. It is defined as the total value of goods & services, which are produced within a country’s borders in a specific time period monthly, quarterly or annually. The average person begins to believe that GDP is one of the many numbers that economists use. Nevertheless, this is not the case. The GDP is central to the subject of macro-economics.
The national income and product accounts (NIPA), which form the basis for measuring GDP, allow policymakers, economists and business to analyze the impact of such variables as monetary and fiscal policy, economic shocks such as a spike in oil price, as well as tax and spending plans, on the overall economy and on specific components of it.
Along with better informed policies and institutions, national accounts have contributed to a significant reduction in the severity of business cycles since the end of world War II. The Gross domestic product (GDP) number is not only the basis for diagnosing the problem with the economy. It is also useful in correcting it. Any government policy’s objective is measured in terms of the effect that it has on the GDP.
The government policy will define in clear quantifiable terms, what change they intend to bring to the GDP number. The success or failure of the government policy will be measured against this number that they have mentioned in their stated objectives.
GDP enables policymakers and central banks to judge whether the economy is contracting or expanding, whether it needs a boost or restraint, and if a threat such as a recession or inflation looms on the horizon.
GDP has a lot of unintended consequences. To a large extent, they attribute the recent economic crisis to the wrong decisions made as a result of this GDP misunderstanding.