GDP calculation formula with three methods to calculate
GDP calculation formula
In this article we will provide you the GDP calculation formula with three methods to calculate.
What is GDP
GDP is a concept whose initials come from gross domestic product . However, depending on the country, we could see how the same concept is written in different ways. For example, gross domestic product or gross domestic product. In the latter case, very commonly used in Argentina, the acronym would be PBI.
With this in mind, it is worth briefly recalling what this concept refers to. According to our economic dictionary , GDP is an economic indicator that reflects the monetary value of all final goods and services produced by a country or region in a certain period of time, usually one year.
Of course, how do we calculate this monetary value? Or, put another way, how is GDP calculated?
To calculate GDP we can use three methods. And, be it said, any of these three methods yield the same result. If not, it is likely that we have done something wrong in the process of calculating GDP.
The three formulas for calculating GDP
Next, we will explain the three methods for calculating GDP.
1-Expense method
The expenditure method helps us calculate GDP in this way. Thus, we will have to add up the residents’ spending on final goods and services during a given period of time.
Then GDP equals final consumption + gross capital formation + exports – imports. The most used way to calculate the GDP of a country is according to its aggregate demand :
GDP = C + I + G + X – M
Where C consumption, I investment, G public spending, X exports and M imports . From this formula we are breaking up each data until we obtain all of them.
In this formula we can observe, ceteris paribus , why when investment (I) increases, GDP tends to grow.
2-Value added method
To calculate GDP using the value added method, we must add the gross value added generated by the production of goods and services. Thus, the GDP formula according to this method is such that:
GDP = GVA + taxes – subsidies
Where GVA refers to gross value added.
For example, if a bakery sells bread, the added value of a loaf will be its price minus the cost of making the loaf (flour, electricity, etc.).
3-Income method
The third method that helps us calculate GDP is equivalent to the sum of income generated by the owners of the productive factors. That said, the GDP formula would be as follows:
GDP = RA + EBE + taxes – subsidies
Where RA is the compensation of employees and EBE is the gross operating surplus.
