GDP, also known as gross domestic product, is the total market value or monetary value of all the finished goods and services produced within the borders of a country during a specific time period.
The total goods and services comprise all the government spending, net exports, investments, and private expenditures.
The three approaches to determine GDP are as follows:
- Expenditure approach
- Income approach
- Output approach
Let us discuss these in brief in the following lines:
The expenditure approach calculates the GDP by calculating the sum of all the services and goods produced in an economy.
The GDP formula is mathematically represented as:
Y = C + I + G + (X − M)
Y = Gross domestic product
C = Consumption
I = Investment
G = Government spending
X = Exports
M = Imports
The components are described in brief here.
- Consumption is denoted by C. It stands for all the private spending, which includes services, non-durable and durable goods.
- Government expenditure is denoted by G and includes employee salaries, construction of roads and railways, airports, schools, and expenditures in the military.
- Investment is denoted by I and refers to all the investments that are spent on housing and equipment.
- Net export is denoted by (X – M), which is the difference between the total imports and exports.
The income approach of GDP calculation is based on the total output of a nation with the total factor of income received by the residents or citizens of a nation.
The formula for calculating GDP by the income approach is:
GDP = Compensation of employees + Rental and royalty income + Business cash flow + Net interest
The output approach emphasises the total output of a nation by finding the value of the total value of goods and services produced in a country.
The formula for calculating GDP by the output approach is:
GDP = GDPmp of primary sector + GDPmp of secondary sector + GDPmp of tertiary sector
GDPmp (for all the sectors is calculated as) = Sales + Change in stock – Intermediate consumption
This was all about the GDP formula, which is a very important concept for determining the total output of a nation in terms of monetary value. For more such interesting concepts, stay tuned to our website.