GDP Expenditure Approach
Resource Cost-Income Approach
|Indirect Business Taxes||x|
|Net Income of Foreigners*||x|
Gross Domestic Product (GDP) Calculations
Gross Domestic Product, popularly abbreviated as GDP, is a term that covers the economy of a country on the widest range. It is the financial value of the entire products and services a country produces in a mentioned period.
Popularly, most countries such as India assess GDP on an annual basis, while other countries such as the USA calculate GDP for every quarter (3 months) of a year, though they release the report based on the annual performance of GDP too.
What factors are considered for calculating GDP?
As mentioned, GDP takes into account all the final economic goods and services produced in a country. These would include:
- Amount spent by consumers on the purchase of various goods and services
- Investments made across different streams such as business and real estate
- Exports made by the government
Importance of GDP
GDP is a critical term to study the figurative economic development of a nation. It helps a government in taking various economic decisions:
- If GDP is low, it is an indication that the economy is slow and is not moving fast. Then the government may have to push in money through various sources to speed up the economy.
- In case GDP is rushing beyond the expectations, then also government will step in and act suitably to keep it in control.
- GDP per capita is another term that is an accepted term to study the standard of living of people of a nation. GDP per capita is obtained by total GDP with the population.
- GDP is a key indicator of investments and upcoming project plans for high-level businesses. Most investors decide their future investments by carefully analyzing the GDP.
World talks GDP but in Bhutan, it’s about National Happiness. Am sure having India as a neighbor would be one of the reasons for the happiness. – Narendra Modi
How is GDP Calculated?
The following are the most preferred and accepted ways of calculating GDP:Calculating GDP based on Expenditure or Spending
In this method, the total money spent by all the people of different economic groups is calculated. This would include investments, purchases, businesses, various activities of the government, etc.
Note that this method does not take into account the imports done by a nation in the specified period. Calculating GDP based on Income
Income includes various sources of money such as rents, profits, wages, etc. From a national level, profits made by businesses, profits obtained through exports, investments obtained from other countries for new projects and businesses, etc. would all include while calculating GDP.
Some countries such as the USA also adds up the following into the income category:
- Indirect taxes such as sales tax and business tax
- Money paid to their country nationals living in other countries
- Depreciation or the decreasing value of the products Types of GDP
Depending on how it is calculated, GDP is mainly of four types:
- 1. Nominal GDP: This is calculated by adding up all the products and services at the existing market conditions, i.e., either inflation conditions or deflation conditions.
- 2. Real GDP: This is the more accurate one compared to Nominal GDP. It takes into account the prices of all the products and services at stable market conditions. This does NOT consider the inflation conditions.
- 3. Actual GDP: This is the GDP at any given instant of time and is an exact mirror of the economy of a nation at that moment.
- 4. Potential GDP: This is an ideal one; it is calculated under ideal conditions such as full employment, steady behavior of a nation’s currency and stable market conditions.
Note: As GDP varies with market prices, economists mostly calculate the GDP based on the prices and market conditions of the previous year. This helps clearly to understand whether the GDP has grown or fallen this year compared to the last year.
Our Gross Domestic Product, or GDP, is barely above one percent. And going down. – Donald Trump
Shortcomings of GDP
Though GDP is used as an accepted standard for studying a country’s economic conditions, it is not a perfect measure. It does not consider many financial transactions as follows, that go unaccounted for a while its calculation: Unpaid domestic chores such as cooking, homemaking, taking care of kids, elderly care, etc. are not accounted while calculating GDP. It is to be noted that without these unpaid activities, outside markets and financial activities cannot work smoothly.GDP does not comprise pollution, safety, and health. Thus it is not a perfect indicator of standard of living of a nation. GDP calculates the aggregate amount. It neglects pay and income inequalities and wage gaps. Illegal activities such as drug dealing, black money in real estates and businesses go unaccounted for in GDP calculation.
How to use CalculatorHut’s GDP calculator?
Using CalculatorHut’s GDP calculator, you can calculate GDP in both the methods. Just enter the various parameters as mentioned in the box and click Calculate.
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