GDP Expenditure Approach

Personal Consumption x
Gross Investments x
Government Consumption x
Exports x
Imports x
GDP xXxX

Personal
Consumption

Gross
Investments

Government
Consumption

Exports

Imports

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Resource Cost-Income Approach

Employee Compensation x
Proprietors' Income x
Rental Income x
Corporate Profits x
Interest Income x
GNP xyxyxy
Indirect Business Taxes x
Depreciation x
Net Income of Foreigners* x
GDP xXxX

Employee
Compensation

Proprietors'
Income

Rental
Income

Corporate
Profits

Interest
Income

Indirect
Business Taxes

Depreciation

Net Income
of Foreigners*

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All You Need to Know About GDP and its Calculation

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:

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:

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:

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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