The acronym “GDP” stands for Gross Domestic Product. The GDP is the calculation of the total output of goods and services produced in an area (usually a country but can be any geographical area) during a given period of time expressed as a monetary price. The GDP is the main indicator used to measure the wealth of a country, and is also known as national income. Normally if GDP grows is considered an achievement and if decreases it is considered a bad trend.
To deepen awareness of the importance of GDP, we see that it is accounted by the national balances and only includes products and services arose within the framework of the formal economy (ie, ignores what is known as black market, trade in services between friends, own food production, etc.).
The fact that it is gross means that capital consumption in the production process is not discounted. Take an example of capital consumption. We have a furniture factory where saws are used to cut wood. These saws are deteriorated from that use, so the purchase of new saws it is needed to continue with the production of furniture. Well, the GDP calculation of the production of furniture does not discount those saws.
There is another indicator called NDP (Net Domestic Product) which takes into account the resources used to produce the final product and discounted. It is important to note that GDP is linked to production within a given territory, beyond the origin of the corporations. A French company with production in Chile rises the Chilean GDP, does not affect the French GDP. To take these kind of situations into account there is another indicator called GNP (Gross National Product) which looks at the origin of the production of those goods and services.
Normally the following formula is used to calculate GDP:
GDP = C + I + G + X-M
Where C is consumption, I Private investment, G government spending, X exports and M imports.
Perverse welfare index
Traditionally GDP has been used to determine the wealth a nation possesses; however, it does not reflect the social and environmental crisis that daily destroys the planet. According to a proposal by the United Nations Environment care, this information to which all countries stick to know the economic situation does not reflect the reality. It is a perverse welfare indicator.
(i.e.) If there is a flood Uruguay the number of people who have to work to raise the country and safeguard the damages would be very high, which would also increase the GDP; although the damage is irreparable and many people became homeless or irreversible poor, this data denote that the country has grown, when in fact has not. This indicates that while the GDP determines an economic activity, does not distinguish whether it is positive or negative for the people in the country.
(i.e.) Imagine a country that has enormous forest resources and at some point all trees are cut in one year, the GDP would increase considerably that year, however the result would be an impoverishment of the territory in the long-term due to the loss of their resources. The current economic system is causing an impact not only economically, but also environmentally, related to the disastrous ways in which the energy waste is disposed. It is one of the cornerstones of this condition. In GDP it is not reflected. So the need to look for deeper implications of the economic activity on people is clue to improve the results of the GDP calculation to make them more realistic.