Friday, August 12, 2022
HomeEconomicsHow to Calculate the GDP

# How to Calculate the GDP [Definition & Formula]

Let’s define GDP first before we talk about how to calculate the GDP.

The gross domestic product is defined as the “value of all final products and services generated in a country in a single year” (GDP). A variety of ratios are calculated using GDP. Here are a few examples:

• NDP: Net domestic product (NDP) is defined as “gross domestic product (GDP) minus capital depreciation.”
• GDP per capita: Gross domestic product per capita (GDP per capita) is the average value of output produced per person, as well as the average income.

Gross domestic product = Gross domestic product​ – Net Foreign Factor Income
GDP = GNP – NFFI

## Determining Gross Domestic Product (GDP)

GDP can be determined in three ways.

1. Production approach (Output)
2. Income approach
3. Expenditure approach

### How to Calculate the GDP Based on Production

The production approach focuses on determining a country’s total product by directly determining the total value of all goods and services produced by the country.

Due to the complexity of the multiple stages in the production of a good or service, only the final value of a good or service is included in the total output.

This avoids a problem known as ‘double counting,’ in which the entire value of a good is included numerous times in national output by counting it again at various stages of manufacturing.

GDP (gross domestic product)  at market price = value of output in an economy in the particular year – intermediate consumption at factor cost = GDP at market price – depreciation + NFIA (net factor income from abroad) – net indirect taxes.

### How to Calculate the GDP Based on Income

The income approach involves determining a country’s total production by determining its total revenue.

This is fair because all of the money spent on the manufacturing of a commodity, as well as the whole worth of the item, is paid as income to the workers.

GDP (gross domestic product) = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income

• Total National Income – The sum of all Wages, Rent, Interest, and Profits.
• Sales Taxes – Consumer tax imposed by the government on the sales of goods and services.
• Depreciation – Cost allocated to a tangible asset over its useful life.
• Net Foreign Factor Income – Difference between the aggregate amount that a country’s citizens and companies earn abroad, and the aggregate amount that foreign citizens and overseas companies earn in that country.

### How to Calculate the GDP Based on Expenditure

The expenditure approach is the most often used form of national output accounting. It focuses on calculating a country’s overall production by totalling all of its expenditures.

This is also acceptable because the total value of all goods equals the total amount spent on products.

GDP (gross domestic product) = C + I + G + (X – M)

• C = Consumption or all private consumer spending within a country’s economy, including, durable goods (items expected to last more than three years), non-durable goods (food & clothing), and services.
• I = Sum of a country’s investments spent on capital equipment, inventories, and housing.
• G = Total government expenditures, including, salaries of government employees, road construction/repair, public schools, and military machines.
• X = Gross exports of goods and services
• M = Gross imports of goods and services

(X – M) = Nx = Net exports or a country’s total exports less total imports.

We covered how to calculate GDP in this post, and we hope you now have a clearer understanding.

Rate this post
RELATED ARTICLES