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· 11 Feb 2022

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How is GDP calculated?

GDP which stands for Gross Domestic Product is the monetary value, in local currency, of every final economic service & goods produced in a country within a particular time. It’s the broadest monetary measurement of a nation’s collective economic activity. Total goods & services which are bought by clients encompass every private expenditure, investment, government spending, plus net exports. Let us understand how GDP is calculated.

How is GDP calculated?
There are 3 ways in using which one could calculate Gross Domestic Product (GDP). These include:
1.    Income Approach
The GDP-income method formula begins with income that’s earned from the production of services and goods. Using the income method, one will calculate income earned through all production factors in the economy.
The production factor includes all the inputs which are used while producing the final service or product. Factors of business production are – Labour, Land, Capital & Management in countries' domestic boundaries.

Here is how you will calculate GDP using the income method
GDP = Sales Taxes + Total National Income + Net Foreign Factor Income + Depreciation
Where, Sales taxes = Government taxes that are imposed on buying goods & services
Total National Income= the total of every rent, wages, interest, & profits
Net-Foreign Factor-Income= It is the difference that’s there in between total income which citizens & companies produce outside the country of origin & the whole income which is generated by companies within the country and foreign citizens.
Depreciation= It is the amount that’s attributed to asset-based on its valuable life
Now when we add taxes & deduct subsidies, it becomes Gross-Domestic Product-formula at the Market cost.
GDP (Market-Cost) = (Indirect Taxes–Subsidies) + GDP (Factor-Cost)

2.    Expenditure Method
This method is the most utilized GDP formula. It is based on money spent by different groups which participate in the economy.
GDP = G + C + NX + I
Where
G is the total expenditures of the government, including government employees’ salaries, road repair/construction, military, and public schools expenditure.
C is the consumption of every private consumer within the country’s economy. This includes durable goods, services, and non-durable goods.
NX is the net-exports or country’s full exports minus total imports.
I is the sum of the country’s investments that’s spent on inventories, capital equipment, & housing.

3.    Output (Production) method
GDP Output approach measures the market or monetary value of every goods & service manufactured within the country’s borders.
To prevent a distorted measure of GDP brought by price level-changes, GDP at continuous prices or Real-GDP is calculated. With the help of the Output-Approach, GDP is computed using the formula below.
GDP (per output-method) = Real GDP (GDP at constant costs) + Subsidies – Taxes.

Gross Domestic Product Types
•    Nominal GDP: This refers to the evaluation of economic production in an economy that includes present prices in the calculation. It’s used when one is comparing various output quarters within the same year.
•    Real GDP: This is an inflation-adjusted amount that reveals the number of goods & services made by an economy in a given year.
Other types include GDP Per Capita, GDP Growth Rate, and GDP Purchasing Power-Parity (PPP).
GDP estimation allows policy-makers & central banks to make decisions whether the country’s economy is expanding or contracting if it requires a restraint or boost. It also helps to identify threats like inflation loom.

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