What is GDP and Why is it so Important?

18 Jun

Recently the term GDP has been heard and or seen everywhere in our media in Tanzania, This follows the presentation of 2012/2013  Government Budget, Do you understand what it means? When Mh. Mgimwa said “The real GDP grew by 6.4% in 2011 compared to 7.0% in 2010” What did he mean exactly?

I will explain below in brief the meaning of GDP (Gross Domestic Revenue)

File:Map of countries by GDP (nominal) in US$.png

Map of Countries by GDP – Source Wikipedia


The Gross Domestic Product (GDP) is one the  primary indicators used to gauge the health  of a country’s economy. It represents the  total money value of all goods and services produced over a specific time  period – you can think of it as the size of the economy. Usually, GDP is  expressed as a comparison to the previous quarter or year. For example, if the  year-to-year GDP is up 3%, this is thought to mean that the economy has grown by  3% over the last year.
Measuring GDP is complicated (which is why we  leave it to the economists), but at its most basic, the calculation can be done  in one of two ways: either by adding up what everyone earned in a year (income  approach), or by adding up what everyone spent (expenditure method). Logically,  both measures should arrive at roughly the same total.
The income  approach, which is sometimes referred to as GDP(I), is calculated by adding up  total compensation to employees, gross profits for incorporated and non  incorporated firms, and taxes less any subsidies.

The expenditure method is the  more common approach and is calculated by adding total consumption, investment,  government spending and net exports.

Why do we Care about GDP?

GDP is the main measure of the health of the economy and is used by the central banks as one of the key indicators in setting interest rates each month. Also it is used by major international organisation like IMF to measure the Economic healthy of countries. See List of Countries by nominal GDP below (Tanzania No. 97) according to IMF data of 2011:


Tags: , , , , , , , , , , ,

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: