What is GDP?

GDP simply refers to Gross Domestic Product and it is considered as the final total value of all the final goods and services that are produced within the domestic boundaries of the country in a particular year. It only includes the goods and services which are produced in a particular year within the country and does not include those goods and services that we import. The rate of growth of GDP helps in comparing the performance of one country with its previous years and also with the other countries.

With the help of the following formula, GDP calculation can be done of a particular country of a specific period which is normally a year:

GDP = C + G + I + NX


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GDP Calculation Methods

The GDP ie. Gross Domestic Product can be calculated with three major methods of GDP calculation which are mentioned below:


Expenditure Method 

This is considered as the most commonly used method to calculate the GDP of the country which does not lie on the income but on the expenditures that are incurred by all within the territorial boundaries of the country on various goods and services. The GDP we calculated with this method will be a nominal GDP. The Formula is given below:

GDP = C + G + I + NX

Here,

C - Total Consumption Expenditure

G - Total Government Expenditures

I - Total Investments

NX - Net Exports

C: It refers to the total expenditure done by all the consumers on goods and services such as food, car, clothes, fuel, etc.

I: The money when invested by the people on the business activities is called Investment Expenditure such as purchasing plant and machinery, buying land, etc.

G: The Expenditure done by the government on various developmental activities. 

NX: It refers to net Exports which we get after deducting total imports from total exports.


Income Method 

This method includes all the income generated by the factors of production which are inputs in the process of producing final goods or services, in the entire economy. The factors of production include land, labour, capital and management/entrepreneurship and income from these are rent, wages, interest and profits respectively. The summation of all these incomes will be called GDP. The GDP formula or GDP equation is given below:

Net National Income = Wages + Rent + Interest + Profits

This will be Net National income and to reach the gross income we have to make some adjustments. For that, the GDP calculation formula is given below:

GDP ( Factor Cost ) = Wages + Rent + Interest + Profits + Depreciation + Net Foreign Factor Income

With this, you will get final income at factor cost before tax. To get the GDP at market price, you can use the following formula:

GDP ( Market Cost ) = GDP ( Factor Cost ) + ( Indirect Taxes – Subsidies )


Output (Production) Method 

The GDP can be calculated by the following formula under this method:

GDP Formula = Real GDP (GDP at constant prices) – Taxes + Subsidies.

This is also called a value-added method which takes into account the value-added in various stages in the process of production of a final product. The Gross value added is being calculated of all the three sectors namely, the primary, secondary and tertiary sector in order to calculate the GDP at market price. The Gross value added can be calculated with the help of the following formula:

Gross value added (GVA) = Value of output – Intermediate consumption

To calculate the national income at factor cost, the following formula can be used:

NNP ( Factor Cost ) = GDPMP – Depreciation + Net factor income from abroad – Indirect taxes + subsidies


Other Formulas Related to GDP

GDP Deflator

It is also known as Price Deflator or Implicit Price Deflator because it helps in measuring of change in prices of the goods and services. It helps in measuring the impact on GDP of inflation at a specific period of the fiscal year. The GDP Deflator formula is given below:

\[\frac{\text{Nominal GDP}}{\text{Real GDP}}\times100\]


Real GDP

This helps in calculating the total goods and services that are produced in the economy at constant prices. It helps in calculating the GDP of the country on the basis of a particular base or previous year. This method is already inflation-adjusted and thus provides more accurate data. The Real GDP formula is mentioned below:

\[=\frac{\text{Nominal GDP}}{\text{R}}\]

Where; R = GDP Deflator


Nominal GDP

It refers to the value of all the goods and services produced in the economy at current market prices and includes all the changes that occur in the market prices because of inflation or deflation during the current year. The Nominal GDP formula is given below:

\[=\frac{GDPDeflator\times RealGDP}{100}\]


GDP Per Capita Formula

It is calculated by dividing the whole GDP with the total population of the country and it helps in calculating the part of GDP that per individual gets as income in the country. The per capita income formula is given below:

\[=\frac{GDP}{Population}\]


Real GDP Per Capita Formula

It can be simply calculated by dividing the Real GDP and the total population in order to measure the per capita share in the GDP. The Real GDP formula of per capita is given below:

\[=\frac{\text{Real GDP}}{\text{Total Population}}\]


Conclusion

To wrap up in the end we can say that the GDP can be calculated with the help of three major methods which includes the income method, expenditure method and value-added method. Here in this article, we have covered GDP calculation with the help of various methods,   such as the Real GDP formula, the formula of Nominal GDP, per capita, GDP Deflator, etc. These formulas will help in understanding the concept of the calculation of GDP.

FAQs (Frequently Asked Questions)

1. What is GDP?

Answer. GDP helps in calculating the total value of all the goods and services which are produced in a particular year within the domestic territories of the country which simply refers to Gross Domestic Product. The GDP growth rate helps in understanding the economic health of the country and helps in comparing the performance with previous years as well as with other countries.

2. What is the Basic Formula of GDP Calculation?

Answer. The Gross Domestic Product can be calculated with the help of below-mentioned Formula:

C + G + I + NX

Where,

C - Total Consumption Expenditure

G - Total Government Expenditures

I - Total Investments

NX - Net Exports

And Net Exports - Total Exports - Total Imports.

3. What is the Difference Between Real GDP and Nominal GDP?

Answer. The Real GDP helps in measuring the total value of goods and services produced in a particular year in the country on the basis of constant prices or we can say on the basis of a particular base year. Here, inflation is already adjusted. On the other hand, Nominal GDP refers to the production and calculation of all the goods and services at the current prices of the market.