# Gross Domestic Product (GDP)

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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