GDP Formula

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21 Aug, 2024

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Formula to Calculate GDP

GDP is Gross Domestic Product and is an indicator to measure economic health. The formula to calculate GDP is of three types: Expenditure Approach, 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.

GDP = C + I + G +NX

Where,

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 government employees, construction, maintenance, etc.
NX= Net country export – Net country import

We can also write this as:-

GDP = Consumption + Investment + Government Spending + Net Export

The Expenditure Approach is a commonly used method for calculating GDP.

#2 - Income Approach -

The Income Approach is a way to calculate GDP by total income generated by goods and services.

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

Where,

Total National Income = 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 earned by a foreign factor like the amount a foreign company or foreign person earns from the country. It is also the difference between a country's citizens and country's 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. Estimating the gross value-added total cost of economic output is reduced by the cost of intermediate goods used to produce final goods.

Gross Value Added = Gross Value of Output – Value of Intermediate Consumption

GDP = Sum of all value-added to products during the production of a process

Formula to Calculate GDP

GDP is Gross Domestic Product. It is an indicator to calculate economic health.
The formula to calculate GDP is of three types: Expenditure Approach, Income Approach, and Production Approach.
The industries included in the GDP are manufacturing, mining, banking and finance, construction, real estate, agriculture, electricity, gas, petroleum, and trade.
The two ways to calculate the GDP in India are economic activity or factor cost and expenditure or market price.

GDP Calculation

Let us see how to use these formulas to calculate GDP.

GDP can be calculated by considering various sector net changed values.
GDP is defined as the market value of all goods and services produced within a country in a given period. It can be calculated on an annual or quarterly basis.
GDP includes every expense in a country like government or private costs, investment, etc. Apart from this, export is also added, and import is excluded.

The industries are as follows:

Manufacturing
Mining
Banking & Finance
Construction
Real Estate
Agriculture
Electricity, gas, and petroleum
Trade

GDP vs GNP Explanation in Video

Examples of GDP Formula (with Excel Template)

Here, we are taking a sample report for Q2 of 2018.

Below are two ways to calculate the GDP in India:

Economic Activity or Factor Cost
Expenditure or Market Price

Example #1

Let us take an example where one wants to compare multiple industries' GDP with the previous year's GDP.

In the below-given figure, we have shown the calculation of total GDP for Quarter 2 of 2017.

Similarly, we have done the calculation of GDP for Quarter 2 of 2018.

And then, changes between two quarters are calculated in percentage, i.e., GDP of industry upon a sum of total GDP multiple by 100.

At the bottom, it provides an overall change in GDP between two quarters. Again, this is an economic activity-based method.

It helps the government and investors decide on investment and allows the government for policy formation and implementation.

Example #2

Now, let's see an example of an expenditure method that considers expenditure from different means. It is inclusive of expenditure and investment.

Below are the different expenditures, gross capital, export, import, etc. These will help calculate GDP.

For Quarter 2 of 2017, total GDP at market price is calculated in the below-given figure.

Similarly, we have calculated 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 calculate the rate of GDP for Quarter2 of 2018.

GDP at market price is a sum of all expenditures. The GDP market price percentage rate is calculated when expenditure is divided by total GDP at market price multiplied by 100.

Through this, one can compare and get a market situation. For example, in a country like India, the global slowdown does not have any major impact only affected factor is export. But on the other hand, if a country has high export, it will get affected by the global recession.

Frequently Asked Questions (FAQs)

What are GDP formula components?

The components of the GDP formula are consumption, investment, government spending, exports, and imports

What is the PPP-adjusted GDP formula?

The PPP adjusted GDP formula refers to the PPP GDP (Gross Domestic Product), in which GDP is converted into international dollars utilizing the purchasing power parity rates.

What is savings in the GDP formula?

The savings in the GDP formula is the disposable income minus the consumption function. Therefore, analyst expresses it as a GDP percentage. Saving in GDP is defined as the portion of household income not consumed and reserved for future use. Since savings are not directly spent on goods and services during the current period, they are not included in the calculation of GDP.