Formula of GDP (Table of Contents)
What is GDP Formula?
GDP is Gross Domestic Product and is an indicator to measure the economic health of a country.
- GDP is defined as the market value of all goods and service produced within a country in a given period of time and it can can be calculated on annually 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 formula to calculate GDP is of three types – Expenditure Approach, Income Approach, and Production Approach.
Formulas for Calculation of GDP
There are three equation to calculate GDP they are as follows:-
#1 – Expenditure Approach-
There are three main groups of expenditure household, business, and the government. By adding all expense we get below equation.
- C = All private consumption/ consumer spending in the economy. It includes durable goods, non-durable goods, and services.
- I = All of a country’s investment on 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 formula can also be written as:-
GDP Formula = Consumption + Investment + Government Spending + Net Export
Expenditure Approach is a commonly used method for the calculation of GDP Equation.
#2 – Income Approach-
The income approach is a way for calculation of GDP Equation by total income generated by goods and service.
- Total national income = Sum of rent, salaries profit.
- Sales Taxes = Tax impose by a government on sales of goods and service.
- Depreciation = the decrease in 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 which is added at the time of production. It is also known as the reverse of expenditure approach. To estimate 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
Explanation of GDP Formula
Let’s see how to use these formulas to calculate GDP Equation.
GDP can be calculated by considering various sector net changed values during a time period.
The industries are as follows:-
- Banking & Finance
- Real Estate
- Electricity, gas, and petroleum
Examples of GDP Formula (with Excel Template)
Let’s see some examples of GDP formula to understand it better.
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
GDP Formula – Example #1
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 quarter 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 government and investor to take the decision of investment and it also helps the government for policy formation and implementation.
GDP Formula – Example of Expenditure Method
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 expenditure, gross capital, export, import etc. which will helps to calculate GDP formula.
For quarter 2 of 2017, total GDP at market price is calculated in the below-given figure.
Similarly, we have done the calculation of GDP Formula 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 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, 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 global recession.
You can download this GDP Formula Excel Template from here – GDP Formula Excel Template
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 –