The development of any country hugely depends upon its ‘gross domestic product’ that is its GDP. The GDP is also known as GDI that is ‘gross domestic income’. To evaluate a country’s development, it is necessary to calculate the GDP of that nation. Before learning how to calculate the GDP of a nation it is necessary to know what exactly GDP is.
GDP or GDI is that amount of goods or services which is produced every year in the country. The market value of all the goods produced inside the borders of a country in a year is called the gross domestic product.
The GDP of a nation can be determined in 3 ways. It is necessary for each of the method to show the same result. Those three methods are:
- The product (output) approach
- The income approach &
- The expenditure approach.
Product approach
The simplest of the three methods is the product approach. In this method, the outputs of every class of enterprise are added to arrive at the total.
Income approach
In this method, the incomes that the firms pay households for the factors of production they hire like wages for labor, interest for capital and rent for the land and profits entrepreneurship are added to measure GDP.
Incomes are divided into 5 categories by The US “National Income and Expenditure Accounts”. These five categories are:
- Wages, salaries and supplementary labor income
- Interests and miscellaneous investment income
- Farmer’s income
- Corporate profits
- Income from non farm unincorporated business
These are five categories in which The US “National Income and Expenditure Accounts” divides the income. At factor costs, these five components add up to net domestic income.
You have to make two adjustments to get the GDP. These adjustments are as follows:
- Deduct subsidies from indirect taxes and add to market prices to get factor cost.
- Capital consumption or depreciation is added to get gross domestic product to get net domestic products.
Expenditure approach
When we measure the total expenditure of money we have used to buy things, it is actually a way to measure production. This method of determining the GDP is called the expenditure approach. Here it is to be noted that if you produce a thing for yourself then it is production but it won’t be counted in GDP because it is not going to be sold. For example, if you have sewed a dress for you, it would be considered as production but it would not be count in GDP because it would never be sold.
Hence, we can understand how expenditure approach works to determine GDP.
The equation for GDP in expenditure method is
Y = C + I + G + (X – M)
Where
Y = GDP
C = consumption
I = investments
G = government spending
(X – M) = net exports
Steps to calculate GDP
- 1. First you have to understand the difference between GDP and GNP. GNP is actually the gross national product. The difference between these two is very simple. GDP stands for all the products and services produced within the border of a country but GNP include all those products which are produced by the citizen of that country staying anywhere in the world.
- 2. Add consumption, government expenditures, investments and net exports, which means exports excluding imports to find out GDP.
- 3. After that compare GDP. GDP is compared in constant dollars.
Calculating GDP of a country is not very tough but you need to have correct data for correct calculation.
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