Gross Domestic Product (GDP)

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Gross Domestic Product is the final value of the goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year. GDP growth rate is an important indicator of the economic performance of a country. GDP is a good economic indicator which helps in gauging the standard of living of a country.

Description: It can be measured by three methods, namely,

1. Output Method: This measures the monetary or market value of all the goods and services produced within the borders of the country. In order to avoid a distorted measure of GDP due to price level changes, GDP at constant prices or real GDP is computed. GDP (as per output method) = Real GDP (GDP at constant prices) – Taxes + Subsidies.

2. Expenditure Method: This measures the total expenditure incurred by all entities on goods and services within the domestic boundaries of a country. GDP (as per expenditure method) = C + I + G + (X-IM)

  • C: Consumption expenditure,
  • I: Investment expenditure,
  • G: Government spending and
  • (X-IM): Exports minus imports, that is, net exports.

3. Income Method: It measures the total income earned by the factors of production, that is, labour and capital within the domestic boundaries of a country. GDP (as per income method) = GDP at factor cost + Taxes – Subsidies.

Types of GDPs

Real gross domestic product is a measurement of economic output that accounts for the effects of inflation or deflation (Zimbabwe Inflation Rates). It provides a more realistic assessment of growth than nominal GDP. Without real GDP, it could seem like a country is producing more when it's only that prices have gone up.[1]

Key Takeaways:

  • Real GDP measures an economy’s total goods and services in a given year, taking into account changes in price levels.
  • It allows one to compare GDP by year because it takes into account inflation.
  • It is a good indicator of where the economy is in the business cycle.
  • Knowing real GDP trends can help one prepare for recessions or make good financial decisions.

Nominal GDP is GDP calculated at the current market price while real GDP adjusts for price changes due to inflation/deflation. For example, if real GDP rises 2% during a year and the inflation rate is 1%, nominal GDP would be 2%+1%=3% for that year. A large difference between nominal GDP and real GDP signifies significant inflationary or deflationary situation in the country.[2]

Calculation of real GDP is not as simple as indicated in the example above. Economists usually use a GDP price deflator which adjusts for this price change. GDP deflator measures the price change in goods and services from the base year used for comparison. Real GDP is derived by dividing nominal GDP by the GDP deflator. As an example, if we consider that the price of an economy’s goods and services have increased by 1% compared to the base year, the deflator would be 1.01.

Real GDP= Nominal GDP/GDP deflator

Real GDP Compared to Nominal GDP

When one hears reports of a country’s GDP that don’t specify the type of GDP, it is likely to be nominal GDP. Nominal GDP includes both prices and growth, while real GDP is pure growth. It is what nominal GDP would have been if there were no price changes from the base year. As a result, the nominal GDP is higher.

The GDP growth rate is crucial for investors when adjusting the asset allocation in their portfolios. By comparing nations' GDP growth rates, it is easy to spot the countries with stronger growth, which, in turn, attract more investors for their corporate stocks, bonds, and even their sovereign debt.

Zimbabwe's Macro-Fiscal Framework 2020

2018 2019 2020 2021 2022
National Accounts (Real Sector)
Real GDP (ZWL$m) 19 845.7 18 555.2 19 114.1 19 738.3 20 998.0
Nominal GDP (ZWL$m) 44 331.9 130 768.5 340 094.5 429 626.9 469 442.3
Real GDP Growth (%) 3.4 -6.5 3.0 3.3 6.4


Zimbabwe GDP Projections

The Government of Zimbabwe through the Ministry of Finance and Economic Development had projected a GDP growth of 3% which was later revised to -4.5% during the 2020 Mid-Term Review.[3]

GDP Projections

Key growth restoration drivers will be agriculture (5%) and mining (4.7%). Manufacturing is expected to recover marginally by 0.1% and Government public administration, education and health are projected to grow by 2.7% in 2020.

Major Contributors to the GDP

The mining sector, which Government intends to grow from a $3 billion to a $12 billion sector by 2023 through coterie of interventions across minerals, has been designated to drive short to medium-term economic growth. Mining generates over 60 percent of Zimbabwe’s export earnings. It is estimated the sector accounts for between 12 percent and 16 percent of the GDP. Government wants mining to anchor economic growth and transformation towards its Vision 2030 of making Zimbabwe a middle income country.[4]

Agriculture occupies a central place in the Zimbabwean economy, some even place the sector as the backbone of Zimbabwe’s economy which underpins the economic, social and political lives of the majority of the people of Zimbabwe. Agriculture contributes about 20% of gross domestic product (GDP). In addition, it contributes over 40%of national export earnings and 60% of raw materials to agro-industries.[5]

References

  1. Kimberly Amadeo, [1], The Balance, Published: 29 June, 2020, Accessed: 11 August, 2020
  2. [2], EDUCBA, Accessed: 11 August, 2020
  3. [3], Ministry of Finance and Economic Development, Published: 16 July, 2020, Accessed: 11 August, 2020
  4. Golden Sibanda, [4], The Herald, Published: 12 October, 2018, Accessed: 1 September, 2020
  5. David Mhlanga, [5], Newsday, Published: 15 May, 2018, Accessed: 1 September, 2020