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.
- Production approach (Output)
- Income approach
- 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.