Gross domestic product economic

 How to calculate the GDP of a country

The gross domestic product (GDP) of a nation is an estimate of the total value of all the goods and services it produced during a specific period, usually a quarter or a year. Its greatest use is as a point of comparison: Did the nation's economy grow or contract compared to the previous measured period?

How to calculate the GDP of a country


GDP can be calculated by adding up all the money spent by consumers, businesses, and the government in a given period.

It can also be calculated by adding all the money received by all participants in the economy.

In any case, the number is an estimate of "nominal GDP".

Once adjusted to remove any effects due to inflation, "Real GDP" is revealed.

There are two main ways to measure GDP: by measuring spending or by measuring income.

And then there is real GDP, which is an adjustment that removes the effects of inflation so that the growth or contraction of the economy can be clearly seen.

Calculation of GDP based on income

The flip side of spending is income. Therefore, an estimate of GDP can reflect the total amount of income paid to everyone in the country.

This calculation includes all the factors of production that make up an economy. It includes wages paid to work, rent earned on land, return on capital in the form of interest, and employer's earnings. All of these constitute the national income.

This approach is complicated by the need to make adjustments to some items that do not always appear in raw numbers. These include:

Indirect business taxes, such as sales taxes and property taxes;

Depreciation, a measure of the decline in value of business equipment over time;

Net foreign factor income, which is the external payments made to the citizens of a country minus the payments those citizens made to the foreigners.

In this income approach, a country's GDP is calculated as its national income plus its indirect business taxes and depreciation, plus its net foreign factor income.

How to calculate the GDP of a country

Real GDP

Since GDP measures the output of an economy, it is subject to inflationary pressures. Over a period of time, prices tend to go up, and this will be reflected in GDP.

A nation's unadjusted GDP cannot tell you whether GDP increased because production and consumption increased or because prices increased.

Real GDP is a measure of the production of an economy adjusted for inflation. The unadjusted figure is known as nominal GDP.

Real GDP adjusts nominal GDP to reflect the price levels that prevailed in a reference year, called the "base year."

How GDP is used

GDP is an important statistic that indicates whether an economy is growing or contracting. In the US, the government publishes an annualized estimate of GDP for each quarter and each year, followed by the final figures for each of those periods.1

Tracking GDP over time helps a government make decisions, such as stimulating the economy by injecting more money into it or cooling it by taking money out of it.

Businesses can use GDP as a factor in deciding whether to expand or contract production or to undertake major projects.

Investors watch GDP to get an idea of ​​where the economy will head in the coming weeks.

Disadvantages of GDP

While GDP is a useful way to get a sense of the state of an economy, it is by no means a perfect approach. One criticism is that it does not take into account activities that are not part of the legalized economy. The proceeds of non-accounting labor, some cash transactions, drug trafficking, and more are not included in GDP.

Another criticism is that some activities that add value are not included in GDP. For example, if you hire a maid to keep your house clean, a cook to prepare your meals, and a nanny to look after your children, you will pay these hired helpers and the payments will be included in GDP. If you do these jobs yourself, your contribution is not counted in GDP.

So while GDP can give an idea of ​​an economy's performance over time, it doesn't tell the whole story.

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Gross Domestic Product

GDP stands for Gross Domestic Product, and a country's GDP is the total value of all final goods and services produced within that country over a period of time.

GDP estimates are used to determine the economic performance of an entire country and to make international comparisons. Businesses can also use GDP as a guide to decide the best way to expand or contract their production and other business activities. And investors even look at GDP as it provides a framework for investment decision making.

Economists typically represent GDP in four ways:

1. Real gross domestic product

Real GDP is GDP after accounting for inflation.

2. Nominal gross domestic product

Nominal GDP is GDP at current prices (that is, with inflation).

3. Gross national product (GNP)

The Gross National Product is the value of the final production produced by nationally owned production factors, regardless of where it is produced.

4. Net gross domestic product

Net Gross Domestic Product is GDP after depreciation has been taken into account.

The following equation is used to calculate GDP:

How to Calculate GDP

GDP = C + I + G + (X-M)

This can also be expressed as GDP = private consumption + gross investment + public investment + public spending + (exports - imports).

Economists determine GDP in three ways; all these methods should give us the same result. They are the production approach (or production or value added), the income approach or the expense approach.

The most direct of the three is the production approach, which adds the products of each type of company to arrive at the total. The spending approach is based on the principle that someone must buy all the products. Therefore, the value of the total product must be equal to the total expense of the people in the purchase of things. The income approach is based on the principle that the income of the productive factors must be equal to the value of their product and determines the GDP by finding the sum of the income of all the producers.

How to Calculate Nominal GDP

As we described earlier, nominal GDP is GDP at current prices (that is, with inflation). To calculate nominal GDP, it is as simple as multiplying the prices of all goods and services by their quantities and finding the total number.

For example, let's say there is an economy that only produces sneakers and backpacks. The following table shows several years of economic production in this country, from 2015 to 2018. For the year 2015, for example, nominal GDP is calculated by multiplying the quantity of shoes produced by the unit price (10,000 x $ 50,000 = $ 500,000) and adding that to the number of backpacks produced multiplied by their price per unit (15,000 x $ 20.00 = $ 300,000).

How to Calculate Real GDP

As indicated above, real GDP represents inflation, so it is the total value of all final goods and services when they are valued at constant prices. In this way, you can more accurately compare GDP between years, without the conflicting variable of inflation rates. To do this, you choose the prices for a particular year and calculate how much the goods and services are worth for the other years you are comparing it to so that inflation is no longer a factor.

For example, let's continue with the example we used to calculate nominal GDP, so that you can compare the numerical difference between nominal and real GDP in the examples. Using 2015 as our base year, sneakers cost $ 50.00 per unit and backpacks cost $ 20.00 per unit. So instead of multiplying by the changing price each year, take the amounts from 2015 to 2018 and multiply them by the 2010 prices. See how this allows you to compare productivity for years more accurately than with nominal GDP?

GDP Deflator Formula

GDP Deflator = Nominal GDP / Real GDP x 100

Having both nominal and real GDP allows you to calculate the GDP deflator. The GDP deflator measures inflation, which makes it a very important metric for understanding the state of an economy. Here is the formula for the GDP deflator: 

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