Name:- Jeevan Jaipal

Roll.NO:- 2K20/ECO/61

Deportment:- Economics

Subject:- Intermediate Economics

Topic:- How To Calculate GDP

 How to Calculate the GDP of a Country
The gross domestic product (GDP) of a nation is an estimate of the total value of
all the goods and services it produced during a specific period, usually a quarter
or a year. Its greatest use is as a point of comparison: Did the nation's economy
grow or contract compared to the previous period measured?

KEY TAKEAWAYS

 GDP can be calculated by adding up all of the money spent by consumers,

businesses, and government in a given period.
 It may also be calculated by adding up all of the money received by all the
participants in the economy.
 In either case, the number is an estimate of "nominal GDP."
 Once adjusted to remove any effects due to inflation, "real GDP" is
revealed.
There are two main ways to measure GDP: by measuring spending or by
measuring income.

And then there's real GDP, which is an adjustment that removes the effects of
inflation so that the economy's growth or contraction can be seen clearly.

 Calculating GDP Based on Spending

One way of arriving at GDP is to count up all of the money spent by the different
groups that participate in the economy. These include consumers, businesses,
and government. All pay for goods and services that contribute to the GDP total.

In addition, some of the nation's goods and services are exported for sale
overseas. And some of the products and services that are consumed are imports
from abroad. The GDP calculation accounts for spending on both exports and
imports. 

Thus, a country’s GDP is the total of consumer spending (C) plus business

investment (I) and government spending (G), plus net exports, which is total
exports minus total imports (X – M).
  Calculating GDP Based on Income
The flip side of spending is income. Thus, an estimate of GDP may reflect the
total amount of income paid to everyone in the country.

This calculation includes all of the factors of production that make up an economy.

It includes the wages paid to labor, the rent earned by land, the return on capital
in the form of interest, and the entrepreneur’s profits. All of these make up the
national income.

This approach is complicated by the need to make adjustments for some items
that don't always appear in the raw numbers. These include:

 Indirect business taxes such as sales taxes and property taxes

 Depreciation, a measure of the decreasing value of business equipment over
time
 Net foreign factor income, which is foreign payments made to a country's
citizens minus the payments those citizens made to foreigners

In this income approach, the GDP of a country is calculated as its national

income plus its indirect business taxes and depreciation, plus its net foreign
factor income.

Real GDP
Since GDP measures an economy's output, it is subject to inflationary pressure.
Over a period of time, prices typically go up, and this will be reflected in GDP.

A nation's unadjusted GDP can't tell you whether GDP went up because
production and consumption increased or because prices went up.

Real GDP is a measure of an economy's output adjusted for inflation. The

unadjusted figure is referred to as nominal GDP.

Real GDP adjusts nominal GDP so that it reflects the price levels that prevailed
in a reference year, called the “base year."
  How GDP Is Used
GDP is an important statistic that indicates whether an economy is growing or
contracting. In the U.S., the government releases an annualized GDP estimate
for every quarter and every year, followed by final figures for each of those
periods.1

Tracking GDP over time helps a government make decisions such as whether to
stimulate the economy by pumping more cash into it or to cool it by pulling
money out.

Businesses may use GDP as a factor when deciding whether to expand or

contract production or whether to undertake major projects.

Investors watch GDP to get a sense of where the economy may be headed in the
weeks ahead.

 Drawbacks of GDP
While GDP is a useful way to get a sense of the state of an economy, it is by no
means a perfect approach. One criticism is that it does not account for activities
that are not part of the legalized economy. The proceeds of off-the-books labor,
some cash transactions, drug dealing, and more are not factored into GDP.

Another criticism is that some activities that provide value are not factored into
GDP. For instance, if you hire a professional cleaner to keep your house clean, a
cook to prepare your meals, and a caregiver to care for your children, you will
pay these employees and the payments will factor into GDP. If you do those jobs
yourself, your contribution is not counted in GDP.

So, while GDP can provide a sense of an economy's performance over time, it
doesn't tell the whole story.