How to Calculate GDP in 3 Different Ways (With Examples)
By Indeed Editorial Team
Published November 6, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
If you want to assess a country's economy, one measurement you can look at is the nation's gross domestic product, or GDP. Assessing a country's GDP can help you determine whether its economy is growing or contracting. There are two ways to calculate the GDP of a nation, so learning about both can help you choose the best method for you. In this article, we explain what gross domestic product is and tell you how to calculate GDP using three different methods with examples.
What is GDP?
GDP is an estimate of the total value of all the goods and services a country produced during a specific time period, such as a quarter or a year. This only includes the final sales of goods and services that companies sold for money. A country's government may calculate its GDP and release the information to the public at the end of every quarter or year. This can help the government, companies, and the public determine whether the country's economy is growing.
Government officials and businesses can then use this information to make informed decisions, such as whether to stimulate the economy or expand business procedures. GDP also typically relates to employment rates and wages. This means if a country's GDP increases, employment rates and salaries may increase as well. Here are the types of GDPs to consider when making decisions:
Real GDP: This is the most accurate reflection of a country's economy as it adjusts the final calculation for inflation.
Nominal GDP: This calculation prices goods and services at their current price levels. Nominal GDP doesn't account for inflation.
Actual GDP: This is a measurement of the country's current economy.
Potential GDP: This calculation reflects the country's economy under ideal conditions, such as low inflation and unemployment rates.
GDP per capita: This is the measure of each person's proportion of the country's GDP. You can divide the real or nominal GDP by the total number of citizens in the country to determine the GDP per capita.
GDP growth rate: This is a measurement of how much a country's GDP increased or decreased over a specific time period. A positive value indicates growth, while a negative growth rate indicates an economic decrease.
How to calculate GDP
If you want to learn how to calculate GDP, consider the following explanations of the three ways to do so:
The expenditure approach is the most common calculation when assessing a country's GDP. It adds all the spending activity within the economy and accounts for net exports. Here are the steps you can follow to calculate GDP using the expenditure approach:
1. Determine the country's consumption
Start by assessing the country's consumption, which is all the money private consumers spent within the country. This includes services, durable goods, and non-durable goods. Durable goods have a lifespan that's greater than three years, such as electronics, while you can use non-durable goods once or for a short period of time, such as food and clothing.
2. Assess the government's expenditures
Next, assess the government's expenditures on public goods and services. This can include the cost of road construction, public schools, and the military. It can also include government salaries.
3. Analyze the country's investments
Assess the money investors within the country spent on acquiring business goods to manufacture products and services. This can include equipment, supplies, rent, and utilities. Only consider businesses that operate within the country.
4. Calculate the country's exports
Finally, assess the country's net imports. This is the total amount of products businesses exported compared to the total amount of purchases consumers made. This can help you determine whether the country is trading more than it's selling domestically.
5. Insert your findings into this formula
Once you collect all the necessary information, you can input it into this formula:
GDP = Consumption + Total government expenditures + Sum of country's investments + Net exports
Here's an example of what this formula can look like if consumption totals $500,000, government expenditures total $1,000,000, investments by the country equal $300,000 and net exports equal $100,000:
$1,900,000 = $500,000 + $1,000,000 + $300,000 + $100,000
The income approach assesses the total income people within the country earned for a specific time period. It also accounts for depreciation, foreign income, and sales tax. Here are the steps you can follow to calculate GDP using the income approach:
1. Assess the country's total income
Start by determining the country's total income. This includes employee wages, interest, rent, and corporate profits. Assess companies' net profit when including this information in your calculation.
2. Consider the country's sales taxes
Next, assess the sales taxes the government imposes on consumers. In many countries, sales tax varies by region. For example, in Alberta, the total sales tax rate is 5% but in British Columbia, it's 12%.
3. Calculate depreciation
Calculate the depreciation of the goods and services you're assessing. The most common method for calculating depreciation is the straight-line method. This is when you estimate a product's worth at the end of its life and subtract it from the cost. Then, divide this amount by the number of years you can use the product. For example, if you expect a phone to be worth $10 when you can't use it anymore in ten years, but you bought it for $100, your calculation may look like this:
$100 - $10 = $90
$90 / 10
This means the product depreciates by $9 each year.
4. Calculate the net foreign factor income
Finally, calculate the country's net foreign income. This is the difference between the total income citizens earned while they were in other countries and the total income foreigners earned while in the country you're assessing. For example, if citizens abroad earned $50,000 and foreigners in the country earned $30,000, the net foreign factor income is $20,000.
5. Insert your findings into this formula
Finally, you can insert your findings into this formula to calculate a country's GDP using the income approach:
GDP = Total national income + Sales taxes + Depreciation + Net foreign factor income
Here's an example of what this formula may look like if total national income is $150,000, sales taxes are $50,000, depreciation is $5,000, and net foreign factor income is $20,000:
$225,000 = $150,000 + $50,000 + $5,000 + $20,000
The production approach, also known as the value-added approach, measures a country's total market value of goods and services. Here are the steps you can follow to calculate GDP using the production approach:
1. Determine the country's gross value of production
Start by assessing the country's gross value of production. This includes the gross market value of all products and services manufactured in every industry. The production method is the known as the reverse of the expenditure approach, as it focuses on the value added to the economy rather than expenses incurred.
2. Calculate the country's value of intermediate consumption
Next, calculate the intermediate consumption companies used to create these goods. This includes all the costs, like labour and supplies, that companies used during the manufacturing process to create these products. For example, if a factory spent $15,000 in supplies, $20,000 on labour, $30,000 on rent, and $10,000 on utilities, its intermediate consumption was $75,000 for the year.
3. Insert your findings into this formula
Finally, you can insert your findings into this formula to calculate the country's GDP using the production approach:
GDP = Gross value of production - Value of intermediate consumption
Your formula may look something like this if gross value of production is $800,000 and the value of intermediate consumption is $200,000:
$600,000 = $800,000 - $200,000
Explore more articles
- Top 11 Machine Learning Tools (With Definition and Features)
- How to Create a Brand Style Guide in 6 Simple Steps
- Stakeholder vs. Shareholder (Differences and Rights)
- How to View and Convert EPUB Files (With Tips and FAQs)
- How to Memorize Things: 17 Effective Techniques to Use
- How to Complete an MHR Degree (With Skills and Job Options)
- What Is Artificial Intelligence Analytics? (With Examples)
- What Is a Landing Page on a Website? (And How to Create One)
- Video Conferencing Zoom Tips for Successful Online Meetings
- Check-In Meeting Benefits and Tips for Effective Planning
- What Is Change Control in Project Management? (With Tips)
- What Is Basic Branding? (With Lists and Helpful Benefits)