GDP stands for Gross Domestic Product and is a measure of all goods and services produced by a nation in a year. GDP is often used in economics to compare the aggregate value of the economic output of different countries. Economists calculate GDP using two main methods: an expenditure-based approach, which measures total spending, and an income-based approach, which measures total income. The CIA World Factbook site offers all the data needed to calculate the GDP of every nation in the world.
Steps
Method 1 of 3: Calculate GDP Using the Spending Method
Step 1. Start with consumer spending
Consumer spending is the measure of total spending on goods and services within a country, incurred by consumers over the course of the year.
Examples of consumer spending may include the purchase of consumer goods such as food and clothing, durable goods such as tools and furniture, and services such as haircuts and doctor visits
Step 2. Add investments
When economists calculate GDP, by investments they do not mean the purchase of shares or bonds, but rather the money spent by companies to purchase goods and services necessary for the business.
Examples of investments include raw materials and services used by a business to build a new factory, or purchases for equipment and software for efficient business management
Step 3. Add the exports minus the imports
Since the GDP only calculates the goods produced in the territory, the imported goods must be subtracted. Exports, on the other hand, must be added because once the goods leave the country, they will not even be added to consumer spending. To calculate imports and exports, take the total export value and subtract the total import value. Then add this result into the equation.
If a nation's imports have a higher value than its exports, this number will be negative. If the number is negative, it must be subtracted rather than added
Step 4. Include Public Spending
The money that the government spends on goods and services must be added to the calculation of GDP.
Examples of government spending include government employee salaries, infrastructure spending, and defense spending. Social security and unemployment benefits are considered transfers and are not included in the public spending because the money is simply transferred from one person to another
Method 2 of 3: Calculate GDP Using the Income Method
Step 1. Start with employment income
This is the sum of wages, salaries, allowances, pensions and social security contributions.
Step 2. Add annuities
Rent is simply the total gain from interest-bearing assets.
Step 3. Add interests
All interest (the money earned from the equity loan) must be added.
Step 4. Add the income of business owners
This income is the money earned by business owners, including incorporated businesses, partnerships and sole proprietors.
Step 5. Add the profits of the listed companies
That is, the income received by the shareholders.
Step 6. Add indirect business taxes
These are all sales, asset ownership and licensing taxes.
Step 7. Calculate all the depreciation and subtract it
It represents the decrease in the value of the goods.
Step 8. Add the net transfer of money from abroad
To calculate this, take the total payments received by resident citizens from overseas businesses and subtract the total payments sent overseas for domestic production.
Method 3 of 3: Differentiate Nominal GDP from Real GDP
Step 1. It is good to distinguish nominal GDP from real GDP to get a more accurate picture of a nation's economic status
The main difference between nominal and real GDP is the following: the real GDP count also takes inflation into account. Not taking inflation into account would lead you to believe that a nation's GDP is increasing when in reality it is only the prices of goods that are increasing.
Imagine this situation: if the GDP of nation A in 2012 was € 1 billion in 2012 and in 2013 it printed and placed on the market € 500 million, obviously its GDP will increase in 2013 compared to the previous year.. The problem is that this increase does not perfectly reflect the production of goods and services of nation A in the year under review. Real GDP, on the other hand, effectively discounts these inflationary increases
Step 2. Choose a reference year
You can choose to consider a period of 1, 5, 10 or 100 years, but you need to choose a year as a reference in order to compare the inflation rate. This is because, after all, the calculation of real GDP is a comparison of data. Therefore, a real comparison can only be made between two or more elements - years and numbers - which are weighed against each other. For a simple calculation of real GDP, choose the year prior to the year in question as a reference.
Step 3. Decide by how much prices have risen since the base year
This factor is called the "GDP deflator". For example, if the inflation rate between the reference year and the year in question were 25%, you will have a deflator equal to 125 or 1 (which is equivalent to 100%) + 0, 25 (i.e. 25%) multiplied per 100. In all cases where there is an inflation rate, the deflator will always be greater than 1.
For example, if the country under study has had deflation, where purchasing power has increased rather than decreased, the deflator coefficient will be less than 1. Let's assume for example that the deflation rate, from the reference year to the year in question of your study, is equal to 25%. This means that the purchasing power of the current currency has grown by 25% compared to the reference period. So, against all of this, the deflator coefficient will be 75 or 1 (100%) minus 0.25 (25%) multiplied by 100
Step 4. Divide nominal GDP by the deflator
Real GDP is equal to the ratio of nominal GDP to the deflator divided by 100. The starting equation is as follows: Nominal GDP ÷ Real GDP = Deflator ÷ 100.
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Therefore, if the current nominal GDP is € 10 million and the deflator is equal to 125 (which means that we are in the presence of an inflation rate of 25% between the reference period and the period in question), the equation for the calculation should be set as follows:
- € 10,000,000 ÷ real GDP = 125 ÷ 100
- € 10,000,000 ÷ real GDP = 1.25
- € 10,000,000 = 1.25 X real GDP
- € 10,000,000 ÷ 1.25 = real GDP
- € 8,000,000 = real GDP
Advice
- A third way of calculating GDP is the value added method. This method calculates the total value added to goods and services for each production step. For example, the added value of a quantity of rubber when it is transformed into a tire is added together. Next, the added value of all the components of a car when assembled into a car is added together. This method is not widely used because double counting and an exaggeration of the real market value of GDP can occur.
- GDP per capita is the measure of how much domestic product the average person in a nation produces. GDP per capita can be used to compare the productivity of nations with very different populations. To calculate GDP per capita, take the Gross Domestic Product and divide it by the nation's population.
