What is GDP or Gross Domestic Product?
The Gross Domestic Product (GDP) measures the value of all the goods and services produced over a period - normally one year - within a certain economy. GDP is an indicator used to gauge the wealth generated by a country.
GDP is calculated quarterly, although the data used to measure the size of an economy - and to make comparisons between countries - is the annual GDP.
A country's economy is growing when the change in GDP increases, i.e. when GDP in a certain year is greater than the preceding year. This means that in general consumption is rising, and expenditure and investment are also rising.
Conversely, when GDP falls, consumption falls, and employment and investment also fall. A recession occurs when the change in GDP has been negative for at least two quarters.
What are the different types of GDP?
A country's Gross Domestic Product can be expressed in nominal or real terms. In other words, the nominal GDP is the value, at market prices, of the production of final goods and services produced over a certain period, whereas the real GDP is the value of production at constant prices (the prices of a specific base year). Real GDP is a better expression of the growth of an economy, since the calculation takes no account of the effect of rising prices.
Also, the concept of GDP per capita measures the relationship between a country's income and its population. To obtain this figure, the country's Gross Domestic Product (GDP) must be divided by the number of its inhabitants.
GDP formula: how is it calculated?
There are several ways to calculate the GDP of an economy: by adding up the total expenditure by consumers on final goods and services; or by adding up the total income paid by businesses to the owners of the factors of production; or by adding up the gross added values of all businesses.
- The expenditure approach.
This is aggregate demand, the total spending by consumers on final goods and services over a certain period of time. The formula is as follows:
GDP = C + I + G + X – M
- C is consumption.
- I is investment.
- G is government spending.
- X is exports.
- M is imports.
- The income approach.
This is the sum of the income received by the owners of the factors of production (labour and capital) over a certain period of time. The formula is:
GDP = W + GOS + Taxes - Subsidies
- W means wages.
- GOS is gross operating surplus.
- The aggregate value approach.
The total of the gross aggregate value generated in the production of the goods and services of an economy over a certain period of time. The formula is:
GDP = GAV + Taxes – Subsidies
- GAV is gross aggregate value
Any of these three GDP formulas will produce the same result.