why gdp is crucial element in economic development
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Answer:
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 and services produced within a country’s borders in a specific time period — monthly, quarterly or annually. GDP is an accurate indicator of the size of an economy and the GDP growth rate is probably the single best indicator of economic growth while GDP per capita has a close correlation with the trend in living standards over time.
Why GDP is Important?
Samuelson and Nordhaus neatly sum up the importance of the national accounts and GDP in their seminal textbook “Economics.” They liken the ability of GDP to give an overall picture of the state of the economy to that of a satellite in space that can survey the weather across an entire continent. GDP enables policymakers and central banks to judge whether the economy is contracting or expanding, whether it needs a boost or needs to be restrained, and if threats such as a recession or rampant inflation loom on the horizon.
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 (spike in oil price), and tax and spending plans on specific subsets of an economy as well as on the overall economy itself. 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. (For related reading, see "What is GDP and Why is It So Important to Economists and Investors?")
GDP Calculation
GDP can be calculated either through the expenditure approach (the sum total of what everyone in an economy spent over a particular period) or the income approach (the total of what everyone earned). Both should produce the same result. A third method, the value-added approach, is used to calculate GDP by industry.