Formula to Calculate GDP
GDP is Gross Domestic Product and is an indicator to measure the economic health of a country. The formula to calculate GDP is of three types – Expenditure ApproachExpenditure ApproachThe Expenditure Approach is one of the methods for calculating a country's Gross Domestic Product (GDP) by adding all of the economy's spending, including consumer spending on goods and services, investment spending, government spending on infrastructure, and net exports., Income Approach, and Production Approach.
#1 – Expenditure Approach –
There are three main groups of expenditure household, business, and the government. By adding all-expense we get the below equation.
- C = All private consumption/ consumer spending in the economy. It includes durable goods, nondurable goods, and services.
- I = All of a country’s investment in capital equipment, housing, etc.
- G = All of the country’s government spending. It includes the salaries of a government employee, construction, maintenance, etc.
- NX= Net country export – Net country import
This can also be written as:-
GDP = Consumption + Investment + Government Spending + Net Export
Expenditure Approach is a commonly used method for the calculation of GDP.
#2 – Income Approach –
The income approach is a way for calculation of GDP by total income generated by goods and services.
- Total national incomeNational IncomeThe national income formula calculates the value of total items manufactured in-country by its residents and income received by its residents by adding together consumption, government expenditure, investments made within the country and its net exports. = Sum of rent, salaries profit.
- Sales Taxes = Tax imposed by a government on sales of goods and services.
- Depreciation = the decrease in the value of an asset.
- Net Foreign Factor Income = Income earn by a foreign factor like the amount of foreign company or foreign person earn from the country and it is also the difference between a country citizen and country earn.
#3 – Production or Value-Added Approach –
From the name, it is clear that value is added at the time of production. It is also known as the reverse of the expenditure approach. To estimate the gross value-added total cost of economic output is reduced by the cost of intermediate goods that are used for the production of final goods.
Gross Value Added = Gross Value of Output – Value of Intermediate Consumption
Let’s see how to use these formulas to calculate GDP.
- GDP can be calculated by considering various sector net changed values during a time period.
- GDP is defined as the market value of all goods and services produced within a country in a given period of time and it can be calculated on an annual or quarterly basis.
- GDP includes every expense in a country like government or private expense, investment, etc. apart from this export also added and import is excluded.
The industries are as follows:-
- Banking & Finance
- Real Estate
- Electricity, gas, and petroleum
Examples of GDP Formula (with Excel Template)
Here, we are taking a sample report of Q2 of 2018.
The GDP in India can be calculated by below two ways:-
- Economic Activity or Factor Cost
- Expenditure or Market Price
Let’s take an example where one wants to compare multiple industries GDP with previous year GDP.
In the below-given figure, we have shown the calculation of total GDP for the Quarter 2 of 2017
Similarly, we have done the calculation of GDP for Quarter 2 of 2018
And then, changes in between two quarters are calculated in terms of percentage i.e. GDP of industry upon a sum of total GDP multiple by 100.
In the bottom, it provides an overall change in GDP between two quarters. This is an economic activity based method.
It helps the government and investor to take the decision of investment and it also helps the government for policy formation and implementation.
Now, let’s see an example of an expenditure method, where expenditure from different means is considered it is inclusive of expenditure and investment.
Below are the different expenditures, gross capital, export, import, etc. which will helps to calculate GDP.
For quarter 2 of 2017, total GDP at market priceMarket PriceMarket price refers to the current price prevailing in the market at which goods, services, or assets are purchased or sold. The price point at which the supply of a commodity matches its demand in the market becomes its market price. is calculated in the below-given figure.
Similarly, we have done the calculation of GDP for Quarter 2 of 2018.
Here, first, the sum of expenditure is taken along with gross capital, change in stocks, valuables and discrepancies which are an export minus import.
A rate of GDP at Market Price –
Similarly, we can do the calculation of a rate of GDP for quarter 2 of 2018.
GDP at market price is a sum of all expenditure and the rate of GDP market price percentage is calculated when expenditure is divided by total GDP at market price multiply by 100.
Through this one can compare and get a market situation. In a country like India, the global slowdown does not have any major impact only affected factor is export if a country is having high export it will get affected by the global recession.
This has been a guide to GDP Formula. Here we discuss how to calculate GDP using 3 types of GDP Formula (Expenditure, Income & Production Approach) along with practical examples & downloadable excel template. You can learn more about Economics from the following articles –