Formula to Calculate GDP

GDP is Gross Domestic Product and is an indicator to measure economic health. The formula to calculate GDP is of three types: Expenditure Approach, Income Approach, and Production Approach.

#1 – Expenditure Approach –

Where,

  • C = All private consumption/ consumer spending in the economy. It includes durable goods, nondurable goods, and services.I = All of a country’s investment in capital equipment, housing, etc.G = All of the country’s government spending. It includes the salaries of government employees, construction, maintenance, etc.NX= Net country export – Net country import

We can also write this as:-

GDP = Consumption + Investment + Government Spending + Net Export

The Expenditure Approach is a commonly used method for calculating GDP.

#2 – Income Approach –

The Income Approach is a way to calculate GDP by total income generated by goods and services.

  • Total National IncomeNational IncomeThe national income formula calculates the value of total items manufactured in-country by its residents and income received by its residents by adding together consumption, government expenditure, investments made within the country and its net exports.read more = Sum of rent, salaries profit.Sales TaxesSales TaxesThe government levies sales tax on the consumption of various goods and services as the percentage added to the product and services from which the government earns revenue and does the company’s welfare. In the United States, 38 different states have different taxes, from Alaska (1.76%) to Tennessee (9.45%).read more = Tax imposed by a government on sales of goods and services.DepreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year.
  • read more = the decrease in the value of an asset.Net Foreign Factor Income = Income earned by a foreign factor like the amount a foreign company or foreign person earns from the country. It is also the difference between a country’s citizens and country’s earn.

#3 – Production or Value-Added Approach –

From the name, it is clear that value is added at the time of production. It is also known as the reverse of the expenditure approach. Estimating the gross value-added total cost of economic output is reduced by the cost of intermediate goods used to produce final goods.

Gross Value Added = Gross Value of Output – Value of Intermediate Consumption

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GDP Calculation

Let us see how to use these formulas to calculate GDP.

  • GDP can be calculated by considering various sector net changed values.GDP is defined as the market value of all goods and services produced within a country in a given period. It can be calculated on an annual or quarterly basis.GDP includes every expense in a country like government or private costs, investmentInvestmentInvestments are typically assets bought at present with the expectation of higher returns in the future. Its consumption is foregone now for benefits that investors can reap from it later.read more, etc. Apart from this, export is also added, and import is excluded.

The industries are as follows:

  • ManufacturingMiningBanking & FinanceFinanceFinance is a broad term that essentially refers to money management or channeling money for various purposes.read moreConstructionReal EstateReal EstateAt its most basic principle, Real Estate can be defined as properties that comprise land and its tangible attachments. The land includes the actual surface of the earth and any permanent natural objects such as water, dirt, or rock and any minerals or particulars under the surface. read moreAgricultureElectricity, gas, and petroleumTrade

Examples of GDP Formula (with Excel Template)

Below are two ways to calculate the GDPGDPGDP or Gross Domestic Product refers to the monetary measurement of the overall market value of the final output produced within a country over a period.read more in India:

  • Economic Activity or Factor CostExpenditure or Market Price

Example #1

Let us take an example where one wants to compare multiple industries’ GDP with the previous year’s GDP.

In the below-given figure, we have shown the calculation of total GDP for Quarter 2 of 2017.

Similarly, we have done the calculation of GDP for Quarter 2 of 2018.

And then, changes between two quarters are calculated in percentage, i.e., GDP of industry upon a sum of total GDP multiple by 100.

At the bottom, it provides an overall change in GDP between two quarters. Again, this is an economic activity-based method.

It helps the government and investors decide on investment and allows the government for policy formation and implementation.

Example #2

Now, let’s see an example of an expenditure method that considers expenditure from different means. It is inclusive of expenditure and investment.

Below are the different expenditures, gross capital, export, import, etc. These will help calculate GDP.

For Quarter 2 of 2017, total GDP at market priceMarket PriceMarket price refers to the current price prevailing in the market at which goods, services, or assets are purchased or sold. The price point at which the supply of a commodity matches its demand in the market becomes its market price.read more is calculated in the below-given figure.

Similarly, we have calculated GDP for Quarter 2 of 2018.

Here, first, the sum of expenditure is taken along with gross capital, change in stocks, valuables, and discrepancies which are an export minus import.

A rate of GDP at Market Price:

Similarly, we can calculate the rate of GDP for Quarter2 of 2018.

GDP at market price is a sum of all expenditures. The GDP market price percentage rate is calculated when expenditure is divided by total GDP at market price multiplied by 100.

Through this, one can compare and get a market situation. For example, in a country like India, the global slowdown does not have any major impact only affected factor is export. But on the other hand, if a country has high export, it will get affected by the global recession.

This article has been a guide to GDP Formula. We discuss the calculation of GDP using 3 types of formulas (Expenditure, Income & Production Approach) with examples and a downloadable Excel template. You can learn more about Economics from the following articles: –

  • Nominal GDP FormulaNominal GDP FormulaThe nominal GDP formula is used to figure out the nation’s gross domestic product at the current price without considering inflation. It is the total of private consumption, gross investment, government investment and trade balance.read moreCalculate Real GDPCalculate Real GDPReal GDP can be described as an inflation-adjusted measure that reflects the value of services and goods produced in a single year by an economy, expressed in the prices of the base year, and is also known as “constant dollar GDP” or “inflation corrected GDP.“read moreCompare Nominal GDP and Real GDPDifferences Between GDP and GNPDifferences Between GDP And GNPGross domestic product (GDP) is a measure of national production for the entire year, whereas gross national product (GNP) is a measure of annual output or production by citizens of a country, whether in their home country or abroad, and thus the country’s border is not taken into account in GNP calculation.read more