Gross domestic product (GDP

Gross domestic product (GDP) is an economic indicator that reflects the monetary value of all final goods and services produced by a country or region in a certain period of time, usually one year. It is used to measure the wealth of a country. Also known as gross domestic product (GDP).

GDP measures the total production of goods and services in a country, so its calculation is quite complex. We have to know all the final goods and services that the country has produced and add them together. That is, the production of apples, milk, books, boats, machines and all the goods that have been produced in the country, up to the services of a taxi, a dentist, a lawyer or a teacher, among others. There is some data that is not included simply because it cannot be accounted for or known. For example, self – consumption  goods or the so-called underground economy for example.

A country is said to grow economically when the GDP variation rate increases, that is, the GDP of the calculated year is greater than that of the previous year. The formula used to see the percentage of variation is:

GDP variation rate = [(GDP year 1 / GDP year 0) – 1] x 100 =%

In summary, before going further, the meaning of GDP refers to the total sum of goods and services produced in a territory during a period, usually a year. If the variation rate is greater than 0, there is economic growth. Otherwise, below zero, there is an economic decrease.

How is gross domestic product (GDP) calculated?

GDP can be measured through three methodologies:

Expenditure method

It is the sum of residents’ spending on final goods and services over a period of time. Then GDP = final consumption + gross capital formation + exports – imports. The most used way to calculate a country’s GDP is according to its aggregate demand :

GDP = C + I + G + X – M

Being C the consumption, I the investment, G the public spending, X the exports and M the imports . From this formula we tear each data until we get all.

In this formula we can see, ceteris paribus , why when a country’s internal consumption decreases, GDP decreases. That is, as long as the rest remains stable. The same occurs when investment, public spending or exports decrease.

Value added method

It is the sum of the added value (gross) that is generated in the production of goods and services in a country in a certain period of time. In this case, the formula for the gross domestic product is:

GDP = GVA + taxes – subsidies

Where VAB refers to the gross value added. See gross value added (VAB)

For example, if a pastry shop sells bread, the added value of a bar will be its price less what it would have cost to manufacture the bar (flour, electricity, etc.).

Income method

It is equivalent to the sum of the income that the owners of the productive factors (labor and capital) earn during a period of time. In this case GDP = compensation of employees + taxes – subsidies + operating surplus. Thus, the formula for the gross domestic product is:

GDP = RA + EBE + taxes – subsidies

Where RA is the compensation of employees and EBE is the gross operating surplus.

GDP growth

When we compare the gross domestic product of a quarter with the previous quarter, we obtain the quarter-on-quarter variation rate, that is, the economic growth that the country is experiencing. If we compare the GDP of a quarter with the same quarter of the previous year, we obtain the interannual rate.

by Abdullah Sam
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