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GDP stands for gross domestic product and is a measure of all the goods and services produced by a country in a year. GDP is often used in economics to compare output across countries. Economists calculate GDP using two main methods: the expenditure-based method, which measures total expenditure, and the income-based method, which measures the total amount of income. The CIA World Factbook website provides all the data needed to calculate the GDP of every country in the world.
Steps
Calculate GDP using the expenditure method
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Start with personal consumption. Personal consumption measures the total spending on goods and services by consumers in a country during a year.
- Examples of personal consumption include purchases of consumables such as food and clothing, durable goods such as tools and furniture, and services such as haircuts or doctor visits.
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Plus investment. For economists, when calculating GDP, investment is not the amount of stocks and bonds purchased, but the amount of money that businesses use to obtain goods and services that support or keep the business running.
- Examples of investments include contracted supplies or services to be used when a business builds a new factory, and orders for equipment and software that help the business run efficiently.
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Add the trade surplus. Since GDP counts only domestically produced products, imports must be excluded. Exports must be added because once they leave national borders, they are not included in private consumption. To account for exports and imports, subtract the total value of exports from the total value of imports. Then add the result to the equation.
- If a country imports more than it exports, the number will be negative. If it’s negative, you need to subtract instead of adding.
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More government consumption. The amount of money a government spends on goods and services must be added to when calculating GDP.
- Examples of government consumption include civil servant salaries, infrastructure spending, and defense. Social insurance and unemployment benefits are considered transfers and are not included in government consumption: the money simply transfers from person to person.
Calculate GDP using the income method
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Start with employee salaries and benefits. This is the sum of all salaries, wages, benefits, pensions and social insurance contributions.
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Plus rental income. Rent is simply the total income earned from owning the property.
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More profit. All interest (money earned from the capital supply) must be added.
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More owner income. Owner’s income is money earned by business owners, including partnerships, partnerships or sole proprietorships.
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Plus corporate profits. This is the portion of income earned by shareholders.
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Add indirect corporate tax. These are all sales taxes, corporate property taxes, and licensing fees.
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Calculate and add up the total depreciation. This is the amount of decrease in the value of goods.
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Add net income from abroad. To calculate, take the total foreign income of the domestic citizen minus the total payment of domestic production to the foreign entity.
Distinguish real and nominal GDP
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Distinguish between real GDP and nominal GDP to get a more accurate picture of what a country is doing. The key difference between real GDP and nominal GDP is that real GDP takes inflation into account. Without factoring in inflation, you might believe that a country’s GDP is growing when, in fact, its prices are rising.
- Think of them as follows. If country A’s GDP in 2012 was 22 trillion dong but in 2013, this country printed and put into circulation 11,000 billion dong, of course its 2013 GDP would be larger than 2012. However, this increase does not reflect good output of goods and services produced in country A. Real GDP effectively eliminates this inflationary increase.
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Select base year. Your base year can be one year, five years, 10 or even 100 years earlier. You need to choose a year to compare inflation. Because, in essence, real GDP is a comparison . And a comparison is only really a comparison if two or more factors — years and numbers — are compared. For a simple real GDP calculation, choose the year preceding the time you are looking at.
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Determine how much the price has increased over the base year. This number is also known as the “deflation index”. For example, if the inflation rate from base year to current year was 25%, the inflation rate would be expressed as 125 or 1 (100%) plus .25 (25%) times 100. In all cases inflation, the deflation index will be greater than 1.
- For example, if the country you are calculating is actually going through a period of deflation , in which case the purchasing power of the currency increases instead of decreasing, the deflation index will fall below 1. Assume the deflation rate from this period the previous period to the current period is 25%. That means a single currency can buy 25% more than the base period. Your deflation would be 75 or 1 (100%) minus .25 (25%) times 100.
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Divide nominal GDP by the deflation index. Real GDP is equal to this rate times 100. It is expressed as the following equation: Nominal GDP ÷ Real GDP = Deflation ÷ 100.
- So, if your current nominal GDP is VND220 billion and the deflation is 125 (base-to-current inflation is 25%), here’s how to set up your equation :
- 220,000,000,000 VND Real GDP = 125 100
- VND 220,000,000,000 Real GDP = 1.25
- 220,000,000,000 VND = 1.25 X Real GDP
- 220,000,000,000 VND 1.25 = Real GDP
- 176,000,000,000 VND = Real GDP
Advice
- GDP per capita measures the average amount of domestic product produced by an individual in a country. GDP per capita can be used to compare the productivity of countries with large differences in population. To calculate GDP per capita, divide the country’s gross domestic product by its population.
- The third way to calculate GDP is the value added method. This method calculates the total value added at each production step of goods and services. For example, add the added value of rubber when the rubber is converted into a tire. Next, add in the added value of all the car’s parts as they are assembled into a complete vehicle. This method is not widely used because it is possible to double-count and overstate the real market value of GDP.
X
This article is co-authored by a team of editors and trained researchers who confirm the accuracy and completeness of the article.
The wikiHow Content Management team carefully monitors the work of editors to ensure that every article is up to a high standard of quality.
This article has been viewed 22,023 times.
GDP stands for gross domestic product and is a measure of all the goods and services produced by a country in a year. GDP is often used in economics to compare output across countries. Economists calculate GDP using two main methods: the expenditure-based method, which measures total expenditure, and the income-based method, which measures the total amount of income. The CIA World Factbook website provides all the data needed to calculate the GDP of every country in the world.
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