GDP measures the value of final goods and services in an economy over a defined period, used to calculate living standards and analyze economic behavior. Raw materials used in production are not included in GDP calculations. Consumption during a period is analyzed to determine economic growth, with excessive consumption leading to inflation.
Gross domestic product (GDP) is a type of economic tool that is used by governments and economists as a means of measuring or attributing value to final goods and related services within an economy over a defined period. Usually, GDP measurement is used to calculate living standards in a country due to its importance in calculating the performance of the economy. Thus, the relationship between GDP and economic growth is the fact that GDP serves as a means of analyzing the behavior of an economy. This link between GDP and economic growth stems from the fact that GDP seeks to measure the total consumption of goods and services within the economy, a factor that helps shed light on the state of the economy under consideration.
When measuring GDP, the only considerations are the final goods, meaning that the raw materials that have been used in the production of the final goods will not be included in this calculation. For example, when calculating toy consumption, which is another way of referring to the number of toys purchased over the period, the calculation will not include the rubber and other raw materials used in the manufacturing of the toys. Otherwise, it would lead to misleading information based on the raw material being counted twice, once when sold to the toy company as raw material and again when sold to consumers as a finished product. Thus, the measurement of GDP would be based on the finished toy only, and the number of such consumables can form the basis for measuring the performance of the economy during the period under consideration, which also establishes a link between GDP and economic growth.
When calculating GDP as part of the process of linking GDP to economic growth, the analysis is broken down into time periods, which can be based on quarterly assessments or four-year assessments. In any case, when consumption during that period is this high, it shows that the economy is performing as expected. When consumption is low, this can be the basis for concern due to negative effects from macroeconomists. Even though consumption is necessary to maintain economic balance, an excessive rate of consumption can have the opposite effect as it can lead to inflation.
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