Gross Domestic Product (GDP) is the total market value of all finished goods and services made within a country for a specific period of time. GDP is used to estimate the size of the economy and the growth rate. It is one of the most important indicators of the economic status of a country. GDP can be calculated in three different ways: Expenditures, Production, and Incomes.
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Expenditures Approach: This approach calculates GDP by adding up all the spending on final goods and services in a country during a specific period of time. The formula for calculating GDP by the expenditures approach is GDP = C + I + G + (X-M), where C is consumption, I is investment, G is government spending, and (X-M) is net exports.
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Production Approach: This approach calculates GDP by adding up the total value of all goods and services produced in a country during a specific period of time. The formula for calculating GDP by the production approach is GDP = GDP at market price – depreciation + NFIA (net factor income from abroad) – net indirect taxes.
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Income Approach: This approach calculates GDP by adding up all the income earned by individuals and businesses in a country during a specific period of time. The formula for calculating GDP by the income approach is GDP = Compensation of employees + Rental & royalty income + Business cash flow + Net interest.
GDP can be stated in nominal, real (inflation-adjusted), or purchasing power parity (PPP) terms. GDP per capita is a measurement of the GDP per person in a countrys population. It indicates that the amount of output or income per person in an economy can indicate average productivity or average living standards.
GDP has limitations, as it ignores business-to-business activity and deliberately nets out intermediate spending and transactions between businesses. By doing so, GDP overstates the importance of consumption relative to production in the economy and is less sensitive as an indicator of economic fluctuations compared to metrics that include business-to-business activity.
