How to Calculate GDP

Macroeconomics is devoted to the study of economic systems which are scaled up to the level of entire countries. It studies the factors which affect the performance of a country's economy. There are several ways to evaluate the performance of any economy. One of the most commonly used methods is 'Gross Domestic Product (GDP)' calculation. The aim of this article is to explain how to calculate the gross domestic product of a country.

Definition of Gross Domestic Product (GDP)

It is good to define the subjects of consideration clearly before moving on to more complex issues. Let me define the 'Gross Domestic Product' in the simplest possible way. It is defined as the sum total value of all types of goods and services produced within a country, in a financial year. The values of these services are calculated according to the current market prices at that point of time. The value may or may not be adjusted for inflation. If it's not adjusted for inflation, it's 'Nominal GDP Per Capita' and inflation is taking into consideration, then it's known as 'Real GDP Per Capita'. This valuation is generally done in terms of the US dollar. Instead of quoting the actual value of GDP, what is generally presented is the GDP growth rate, which is the percentage increase or decrease in the value, since the year before.

Definition of GDP Per Capita

So now you may ask, what is GDP per capita. It is the value obtained after you divide the nominal GDP calculated for the country, by the total population of the specific country under consideration. The GDP per capita, gives you an idea about the goods and services created per person in the country. Let me now illustrate how to calculate the GDP per capita of a country.

How to Calculate GDP Per Capita?

As I said before, there are more than one ways to calculate gross domestic product. The method that I'll explain here is known as the expenditure method. It is a sum total of the goods and services produced in the country, evaluated in terms of amount of expenditure made by various constituents that make an economy. Here is the formula:

Gross Domestic Product (GDP) = (Private Consumption of Goods & Services) + (Gross Total Investment) + (Amount of Government Spending) + (Net Exports - Net Imports)

To calculate GDP per capita, this value obtained through summing of expenses should be divided by the total population of the country. Thus the GDP calculation based on expenditure takes four prime factors into consideration which includes the net value of private consumption of goods and services in the country, the gross investment made by businesses, the amount of government spending on various national projects and the total amount of exports out of the country, less the net value of imports. There are other ways employed in economics for GDP calculation, which includes the income method. This technique measures the income of various sectors of the economy in a financial year. Either way, both the methods should give the same GDP as the amount spent by somebody is the amount earned by someone!

Without adequate data about all the goods sold and services provided by the businesses in the country, along with information about government spending and private investments, it's not possible to get a realistic value of GDP. That data is only completely accessible to federal departments of finance. However, data about the national GDP is voluntarily shared by governments with the people. Calculating real GDP, which is adjusted for inflation which affects market prices is not discussed here as it's a considerably complex concept, which requires knowledge of inflationary parameters. I hope this article has conveyed the gist of GDP calculation, which may prompt you to study this concept further in more detail.