How The Gross Domestic Product is Calculated

How The Gross Domestic Product is Calculated

Gross Domestic Product

GDP or Gross Domestic product is the value provided by the government of the country about the total amount of goods and services which has been produced in the country over the period of time. The standard of living of the country can be determined by the GDP per Capita which is Total Gross Domestic product divided by the total number of population in the country (Boyes & Melvin, 2010).

There are three ways through which GDP is calculated. The approaches are income approach, expenditure approach and the product approach. The most direct method which is used to calculate GDP is the product approach which accumulates all the outputs from all the production houses in the country. This provides the GDP figure of what the country has been producing throughout. The expenditure approach has an underlying assumption which clearly states that all the products must be bought by the people therefore the amount of goods produced must equate the expenditure of the people. The income approach relies on the fact the income of the productive factors working I the country must equate to their expenditure, thus by adding up the sum of income of all producer's income producer's income is derived.

Gross stands for all production which is being produced in the country regardless of the fact that for what uses they have been utilized by the people who have produced those products. The products can be used to make additional products, or can be invested for future profits or it can be consumed immediately. Domestic refers to the consumption which had taken place within the country and does not include anything which has been produced by the country but has been exported. This is the reason why export and imports are subtracted so that the effect can be nullified for the goods which has been consumed in the country and the goods which has been produced but not consumed in the country (Arnold, 2010).

Economist since the times of Keynes has split the production and consumption into two significant parts. They are private consumption and public consumption which is also known as public spending. GDP is the topic which falls under the macroeconomics as it encompasses broader segment of the economy.

The reason for splitting is

In welfare economics private consumption is a major concern. The private consumption and investment in the economy is primarily decided in order to induce the long-term investment in the country.

Government consumption constitutes a major chunk of development spending in the economy.

Approaches to calculate GDP

Production approach

Production approach consists of adding up the market value of the all the goods and services which are produced and consumed within a year. This method is also referred as Value added method or the Net product method and it has 3 significant stages.

Developing estimates of the Gross Value of the Domestic Output and related economic activities which are ...