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Gross Domestic Product Types and Methods of GDP Calculation

GDP's full form is Gross Domestic Product. It is the term used to describe the total value of all the goods and services a country produces within its boundaries during a certain time. GDP is an essential indicator of a country's economic health and standard of living, as it reflects the size and growth of the economy, the income and consumption levels of the people, and the productivity and competitiveness of the industries.

Now that you know what is GDP, let’s talk about its types.

Types of GDP

To better understand the GDP definition, learning about their types is crucial.

1. Nominal GDP

Nominal GDP is computed by multiplying the quantity of each good or service by its current price and then adding up the values of all the goods and services.

For example, if India produces 100 units of rice at Rs. 20 per unit and 50 units of wheat at Rs. 40 per unit in a given year, then the nominal GDP of India for that year is:

Nominal GDP = (100 × 20) + (50 × 40)

2. Real GDP

Real GDP is a more accurate way to measure GDP. It is based on the constant prices of the goods and services produced, using a base year or the previous year to account for inflation or deflation. Real GDP is calculated by multiplying the quantity of each good or service by its price in the base year or the previous year and then adding up the values of all the goods and services.

For example, if India produces 120 units of rice at Rs. 22 per unit and 60 units of wheat at Rs. 44 per unit in the next year and uses the previous year as the base year, then the real GDP of India for the next year is:

Real GDP = (120 × 20) + (60 × 40) = Rs 4800

3. Actual GDP

Actual GDP is a more realistic way to measure GDP, as it is based on the economy's current output in real time. Actual GDP is calculated using the latest data and estimates of the quantity and price of the goods and services produced without using a base year or the previous year.

For example, if India produces 130 units of rice at Rs. 24 per unit and 70 units of wheat at Rs. 48 per unit in the current year and uses the most recent data and estimates, then the actual GDP of India for the current year is:

Actual GDP = (130 × 24) + (70 × 48) = Rs 5760

How to calculate GDP?

Understanding GDP meaning is incomplete if you are unaware of its calculation method.

Expenditure approach

The expenditure approach is based on the idea that the value of the output of an economy is equal to the value of the spending on that output. This method calculates GDP by adding up the money spent by different economic groups, such as households, businesses, and the government. The formula for the expenditure approach is:

GDP=C+G+I+NX

Where:

  • C is consumption or all private consumer spending within a country's economy, including durable goods (such as cars and furniture), non-durable goods (such as food and clothing), and services (such as health care and education).
  • G is government spending or all of the country's government expenditures, including salaries of government employees, road construction and maintenance, public schools, and military spending.
  • "I" is an investment or the sum of a country's investments spent on capital equipment (such as machinery and tools), inventories (such as raw materials and finished goods), and housing (such as residential construction and renovation).
  • NX is net exports or the difference between a country's total exports (goods and services sold to other countries) and total imports (goods and services bought from other countries).

Income approach

The approach assumes that the value of the output of an economy is equal to the value of the income generated by that output. This method calculates GDP by adding up the income earned by the production factors (such as labour and capital) used to produce the goods and services in the economy. 

Formula:

GDP= Total National Income + Depreciation + Sales Taxes + Net Foreign Factor Income

Output or production approach

This approach assumes the value of an economy's output is equal to the sum of the value added by each sector. This method calculates GDP by adding up the value added by each industry, such as agriculture, manufacturing, and services. The value added by a sector is the difference between the value of its output and the value of its intermediate inputs (such as raw materials and energy). 

GDP= Value Added by Agriculture + Value Added by Manufacturing + Value Added by Services

Conclusion

GDP is important, but it is not a perfect measure of economic well-being, as it does not account for some factors, such as the quality and handling of goods and services, the environmental and social costs of production, the informal and non-market activities, and the happiness and welfare of the people.

 

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