Macroeconomics – Calculating GDP
Gross domestic product (GDP) is the total market value of all final goods and services produced within a given period by factors of production located within a country.
Nominal GDP is GDP evaluated at current market prices. Therefore, nominal GDP will include all of the changes in market prices that have occurred during the current year due to inflation or deflation. Inflation is defined as a rise in the overall price level, and deflation is defined as a fall in the overall price level.
In order to abstract from changes in the overall price level, another measure of GDP called real GDP
is often used. Real GDP is GDP evaluated at the market prices of some base year. For example, if 1990 were chosen as the base year, then real GDP for 1995 is calculated by taking the quantities of all goods and services purchased in 1995 and multiplying them by their 1990 prices.
•GDP is the value of output produced by factors of production located within a country. Output produced by a country’s citizens, regardless of where the output is produced, is measured by gross national product (GNP).
GDP can be computed in two ways:
•The expenditure approach: A method of computing GDP that measures the total amount spent on all final goods during a given period.
•The income approach:
A method of computing GDP that measures the income—wages, rents, interest, and profits—received by all factors of production in producing final goods.
The Expenditure Method of calculating GDP (aggregate demand)
This is the sum of spending on countries produced goods and services measured at current market prices. The full equation for GDP using this approach is GDP = C + I + G + (X-M) where
C: Household spending
I: Capital Investment spending
G: Government spending
X: Exports of Goods and Services
M: Imports of Goods and Services
The Income Approach
•National income is the total income earned by the factors of production owned by a country’s citizens.
•The income approach to GDP breaks down GDP into four components:
GDP = national income + depreciation + (indirect taxes – subsidies) + net factor payments to the rest of the world + other