What Gross Domestic Product (GDP) Means and the Formulas
One economic term that is often heard is Gross Domestic Product or commonly abbreviated as GDP. To find out more about what GDP means, keep reading to understand further about the definition and formula!
What does Gross Domestic Product (GDP) mean?
Investopedia said that the value of all completed goods and services produced in a country over a certain time period is estimated using the Gross Domestic Product (GDP) statistic. The GDP means to calculate all of the output of domestic businesses, plus any income earned by citizens from foreign sources, minus any income paid to foreigners from domestic sources.
GDP is usually expressed as a comparison to the previous year’s figure, to show whether the country’s economy is growing or shrinking. Increases in GDP are considered good news for a country, as they indicate that more goods and services are being produced.
There are a number of factors that can affect a country’s GDP, including changes in population, the prices of goods and services, and the exchange rate between the country’s currency and other currencies.
What is the GDP Formula?
After learning what GDP means, you should also know how to calculate it. There are two methods for calculating GDP. Take a look at these two ways to find out:
1. Expenditure approach
This formula is the most commonly used to determine the amount of Gross domestic product, the data viewed is the amount of money spent by various groups participating in the economy.
GDP = C + G + I + (X-M)
Description:
C: all expenditures or total private consumption of a country’s economy. Consumption consists of services, non-durable items, and durable items.
G: all expenditures incurred by the government, including salaries of government employees, construction and repair of roads, public schools and all costs for military purposes.
I: all expenditures incurred by the country for inventory purposes, capital equipment, and construction of residential housing.
X: total exports
M: total Import
2. Income Approach
This formula of GDP means to show the calculation result of the total income of goods and services that are produced.
GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income
Description:
Total National Income: the amount of wages in the form of rent, interest and profit, all summed up and then added to the total other income.
Sales Taxes: taxes taken from consumers. The government sets taxes on consumers who sell goods and services.
Depreciation: all costs allocated to tangible assets. The total cost is calculated as long as the asset is still in use and still useful.
Net Foreign Factor Income: the difference between the total income generated by foreign nationals and companies and the total income of foreign nationals in companies in their own country.
Understand Enough About GDP?
It can be concluded that GDP means to measure the total value of all goods and services produced in a country in a given year, with the intention of seeing the economic performance of a country. After reading the article above, you’ll totally know how to figure out GDP like a boss!
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