Calculate GDP

GDP stands for gross domestic product and is a measurement of all the goods and services a nation produces in a year. GDP is often used in economics to compare the economic output of countries. Economists calculate GDP using two main methods: the expenditure approach, which measures total spending and the income approach, which measures total income. The CIA World Factbook website provides all the data necessary to calculate GDP of every nation in the world.

Steps

Help Calculating GDP

Doc:GDP by Expenditure,GDP by Income

Calculating GDP Using the Expenditure Approach

1. Start with consumer spending. Consumer spending is the measure of all spending a nation's consumers make on good and services during the year.
   • Examples of consumer spending would include the purchase of consumable goods like food and clothing, durable goods like tools and furniture, and services such as hair cuts and doctor visits.
2. Add in investment. When economists calculate GDP, investment does not mean the purchase of stocks and bonds, but rather money spent by businesses to acquire goods and services to help or maintain the business.
   • Examples of investments include materials or contracting services used when a business builds a new factory, equipment purchases and software to help a business run efficiently.
3. Insert the excess of exports over imports. Because GDP only calculates products produced domestically, imports must be subtracted out. Exports must be added in because once they leave the country, they will not be added in through consumer spending. To account for imports and exports, take the total value of exports and subtract the total value of imports. 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, subtract it instead of adding it.
4. Include government spending. The money a government spends on goods and services must be added to calculate GDP.
   • Examples of government spending include payroll for public employees, spending on infrastructure and defense spending. Social security and unemployment benefits are considered transfer payments and are not included in government spending because the money is simply transferred from one person to another.

Calculating GDP Using the Income Approach

1. Start with employee compensation. This is the total of all salaries, wages, benefits, pensions and social security contributions.
2. Add in rent. Rent is simply the total income earned from property ownership.
3. Include interest. All interest (money earned by supplying capital) must be added.
4. Add proprietor's income. Proprietor's income is the money earned by business owners, including incorporated businesses, partnerships and sole proprietor-ships.
5. Add in corporate profits. This is the income earned by stockholders.
6. Include indirect business taxes. This is all sales tax, business property tax and license fees.
7. Calculate all depreciation and add it in. This is the decrease in value of goods.
8. Add in net foreign factor income. To calculate this, take the total payments received by domestic citizens from foreign entities and subtract the total payments sent to foreign entities for domestic production.

Differentiating Nominal and Real GDP

1. Differentiate between nominal and real GDP for a more accurate picture about how a country is doing. The main difference between nominal and real GDP is that real GDP takes inflation into account. If you don't take inflation into account, you could believe that a country's GDP is increasing when really their prices are increasing.
   • Think about it like this. If GDP of country A was $1 billion in 2012, but in 2013 it printed and then circulated $500 million, of course its GDP is going to be bigger in 2013 than it was in 2012. But this increase isn't a good reflection of the goods and services produced in country A. Real GDP effectively discounts these inflationary increases.
2. Choose a base year. Your base year can be a year back, five years, 10, or even 100. But you need to choose a year against which to compare the inflation. Because, at heart, real GDP is a comparison. And a comparison is only really a comparison if two or more things — years and figures — are being weighed against one another. For a simple real GDP calculation, choose the year prior to the year you're looking at.
3. Decide how much prices have gone up from the base year. This number is also called the "deflator." If your rate of inflation from the base year to the current year is 25%, for example, you'd list that inflationary rate as 125, or 1 (100%) plus .25 (25%) times 100. For all cases of inflation, the deflator is going to be higher than 1.
   • If, for example, the country that you're measuring actually experienced deflation, where purchasing power increased instead of decreased, the deflator would drop below 1. Say, for example, the rate of deflation was 25% from the base period to the current period. That means the currency can buy 25% more than it used to in its base period. Your deflator would be 75, or 1 (100%) minus .25 (25%) times 100.
4. Divide the nominal GDP by the deflator. Real GDP is equal to the ratio of your nominal GDP divided by 100. As an equation, it starts off like this: Nominal GDP ÷ Real GDP = Deflator ÷ 100.
   • So, if your current nominal GDP is $10 million, and your deflator is 125 (inflation was 25% from the base period to the current period), this is how you'd set up your equation:
     • $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

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Tips

• A third way to calculate GDP is the value-added approach. This method calculates the total value added to goods and services at each step of production. For example, the value added to rubber when the rubber is made into tires is added. Then the value added to all of an automobile's components when they are assembled into an automobile is added. This method isn't as widely used as double counting and an exaggeration of the true market value of GDP can occur.
• GDP per capita is the measurement of how much domestic product the average person in a nation produces. GDP per capita can be used to compare productivity of nations with vastly different populations. To calculate GDP per capita, take the nation's gross domestic product and divide by the nation's population.

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Sources and Citations

• http://www.mindtools.net/GlobCourse/formula.shtml
• http://wps.prenhall.com/bp_casefair_econf_7e/31/7936/2031705.cw/index.html
• http://staffwww.fullcoll.edu/fchan/macro/2gdp_computation.htm

See also

• Review Basic Economics for a Consulting Interview
• Calculate a Discount
• Calculate Annualized GDP Growth Rates
• Calculate Interest
• Calculate the Growth Rate of Nominal GDP
• Maximize Revenue Per Price Via Excel
• Find and Analyze Demand Function Curve
• Recognize a Demand Function Curve Among Standard Types
• Calculate Marginal Cost
• Become an Economist

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