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Gross Domestic Products – GDP
The gross domestic product (GDP) is a measure of a given county’s national income. An alternative term for gross domestic product is gross domestic income (GDI). The income of a nation is measured by the total value of all services and goods produced within the borders of that country during a set period (normally a 356-day year). The GDP of a given country is a key indicator of the performance of that economy.
How to Calculate Gross Domestic Products
The gross domestic product is calculated using three methods:
1.) Total value of final good and services produced by a country. To calculate a nation’s GDP, all the prices of all goods and services rendered needs to be determined. These also include intermediate goods and services that are bought as an input source for producing the final goods.
2.) Total sum of value added to services and final goods at every stage of production by all concerned parties in that country.
3.) Total sum generated income during the production stages. This includes profits, taxes and tariffs on goods and remuneration (wages) of workers.
There are three known methods of calculating GDP, which will give identical results:
1. The expenditure approach – GDP is determined by calculating the final figure of total spending on goods and services.
2. The product approach – GDP is determined by calculating the total market value of goods and services produced.
3. The income approach – GDP is determined by calculating the total the income received by all producers in the country.
Let’s investigate one popular method of calculating GDP by calculating the final figure of total spending on goods and services – the expenditure approach. This method resolves around adding the sum of the four main types of expenditures in a country.
This method is based on: GDP = Consumption + Investment + Government Purchases + Net Exports
Consumption forms the largest part of the GDP and consists of the total amount of expenditures on durable and non-durable goods and services produced by a country. The consumption element of the equation does not include the value of imported goods or services. These expenditures include the total spent on food, clothes, medical services and fuel.
Investment includes the acquiring of machinery by companies, the construction of new infrastructure (factories etc.) and purchasing of new homes by consumers. To label a service or basket of goods as either investment or consumption, is not always clear and the dividing line tends to move periodically.
Government Purchasing (Spending) includes the purchasing of items such as military equipment, payment of government officials, and payment for infrastructure maintenance. Excluded from this equation are social services as caring for the elderly, caring for the unemployed as these services are classified as transfers. The total government purchases are thus equal to government expenditures minus government transfer payments.
Net exports are the total exports minus total imports. This total looks at the amount of our produced goods and services that are received by foreigners. The total spent on imports is subtracted from the totals spent on export to determine the net export figure.
We hope that you have found our article on Gross Domestic Products (GDP) informative and that you now have a better grasp of what the term gross domestic product means.