Gross Domestic Product (GDP)

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Gross Domestic Product

What is GDP?

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:

  1. Expenditure approach
  2. Income approach
  3. Output approach

Let us discuss these in brief in the following lines:

  1. Expenditure approach

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)

Where,
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.

2. Income approach

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

3. Output approach

The output approach emphasizes 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 = GDP(MP) of primary sector + GDP(MP) of secondary sector + GDP(MP) of tertiary sector

GDP(MP) (for all the sectors is calculated as) = Sales + Change in stock — Intermediate consumption