Calculation of GDP using the distribution method. Gross Domestic Product (GDP) and Gross National Product (GNP)
The online calculator is designed to calculate GNP based on the flow of income and expenses using the following formulas:
- GNP based on total income
GNP = Z + R + K + P + A + Nb
Where Z is remuneration for labor employees, including contributions for social needs; R – income received by owners of land, buildings and structures; TO - interest income, received by firms and households for the loan provided; A - depreciation; P - corporate profit; Nb - indirect taxes.
- GNP based on the sum of all expenses
GNP = C + I + G + Xn
Where C is personal consumer spending;
I – gross private domestic investment; G – government procurement of goods and services;
Further
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Relationship between GDP and GNP indicators:
2. Pensions GNP = GDP + net factor income from abroad
GNP by expenditure(I) are the costs of firms and the purchase of investment goods. Investment goods are understood as goods that increase the stock of capital:
- investments in fixed capital, which consist of the costs of firms: a) for the purchase of equipment; b) on industrial engineering (industrial building and structures);
- investment in housing construction(household expenditures on housing purchases);
- investments in inventories (inventories include: a) stocks of raw materials and materials necessary to ensure the continuity of the production process; b) work in progress, which is related to technology production process; c) inventories of finished (produced by the company) but not yet sold products.
Fixed investments= Investments in fixed assets + investments in housing construction
Investments in inventories= Inventories at the end of the year - Inventories at the beginning of the year = Δ
If the amount of reserves increases, then GDP increases by a corresponding amount. If the value of inventories has decreased, which means that in a given year the products produced and replenished in the previous year were sold, therefore, the GDP of that year should be reduced by the amount of the decrease in inventories. Thus, investment in inventories can be either positive or negative.
Gross Domestic Private Investment= net investment + depreciation (cost of capital consumed, replacement investment)
Net Investment
= net investment in fixed assets + net investment in housing construction + investment in inventories
Investment expenditures in the system of national accounts include only private investments, i.e. investments by private firms (private sector), and does not include government investments that are part of government procurement of goods and services. This component of total expenditure takes into account only domestic investment, i.e. investments of resident firms in the economy of a given country. Foreign investments resident firms and investments of foreign firms in the economy of a given country are included in net exports.
Government procurement of goods and services(G):
- government consumption (maintenance costs government agencies and organizations providing economic regulation, security and law and order, political administration, social and industrial infrastructure, as well as payment for services (salaries) of public sector employees);
- public investment (investment expenditures of state-owned enterprises)
Government spending= transfer payments + interest payments on government bonds
Interest payments on government bonds are not included in GDP because government bonds are not issued for production purposes (they are neither a good nor a service), but for the purpose of financing a deficit state budget.
Net exports= export revenues - import costs
GNP by income
Wages and salaries of employees= basic salary + bonuses + all types of financial incentives + overtime paySalaries of civil servants are not included in this indicator, since they are paid from the state budget (budget revenues) and are part of government procurement, and not factor income.
Rent or Rent- income from real estate ( land plots, residential and non-residential premises)
Interest payments or interest- income from capital (interest paid on bonds of private firms)
Interest payments on government bonds are not included in GDP.
Profit:
- profit of the non-corporate sector of the economy, including sole proprietorships and partnerships (this type of profit is called “income of owners”;
- profit of the corporate sector of the economy:
- corporate income tax (paid to the government);
- dividends (distributable portion of profits) that a corporation pays to shareholders;
- retained earnings of corporations, remaining after the company’s settlements with the state and shareholders and serving as one of internal sources financing of net investment, which is the basis for the corporation to expand production, and for the economy as a whole - economic growth.
Indirect taxes= Taxes - Direct taxes
Methods for calculating GDP
There are two different approaches to measuring GDP. We can consider GDP as the amount of expenses necessary to buy the entire volume of produced products on the market. This method of determining GDP is based on the volume of output and is usually called the cost method. Another approach involves analyzing GDP in terms of the income received or created in the process of its production. This method is called the distribution or income method of determining GDP.
Income calculation method
GDP = w + r + R + p + A + T,
where w is wages;
r -- income and interest on property;
R -- rent payments;
P - profit;
A -- depreciation, or the cost of restoring worn-out capital;
T -- indirect taxes (it is assumed that all direct taxes have already been taken into account).
GDP consists of three components:
1 component: the sum of factor incomes across the national economy;
2 component: depreciation;
Component 3: indirect taxes.
Factor incomes (form national income):
Wages, rent, profit, interest. Received from the sale of factors of production: labor - wages; capital - interest; entrepreneurship - profit; land is rent.
Cost method of calculating GDP
In our work we will use the cost method of determining GDP.
To determine the volume of GDP based on costs, we sum up all types of expenses for finished, or final, products and services.
“This can be expressed by a mathematical formula:
Where C is the expenses of consumer households,
I - investments of firms,
G- government spending for the purchase of goods and services.
Economists usually include a fourth element in calculating GDP - the foreign trade balance, which is the difference between exports and imports." Page 22 “Applied Economics: Tutorial for high school students: Per. from English - M.: PRIN-DI, 1995. -240 p.” (the last, fourth element is pure export and below in the formulas it will be denoted as Xn)
As a result, we get the formula
GDP = C + I + G + Xn,
Let's look at each component of this formula in more detail below.
Personal consumption expenditure (C)
Cover expenses household on consumer goods durable consumer goods (cars, computers, refrigerators, etc.), nondurable consumer goods (food, vitamins, toothpaste, etc.), and consumer spending on services (lawyers, doctors, teachers, mechanics, hairdressers, etc.) etc.). We denote all expenses of this part of GDP by the symbol C.
· Gross private domestic investment I.
(The inclusion of the words “private” and “domestic” in this term means that we are talking about the expenses of private companies, as opposed to government (public) bodies, and that the investments are made within the country, and not abroad.
“Investment is the use of money to acquire real capital(equipment, new machines, industrial buildings), intended for the production of goods and services." Page 215 “Applied Economics: A Textbook for High School Students: Trans. from English - M.: PRIN-DI, 1995. -240 p.”
Gross domestic investment includes:
b all final purchases by business enterprises of machinery, equipment, tools;
b all construction (construction of housing, new factories, warehouses and shops)
“Why is housing classified as investment and not consumption? The fact is that residential buildings are investment goods, which, like factories and stores, are assets that, when rented or leased, can generate income. Therefore, all types of housing that are allocated by owners and that can be rented or leased and generate income are considered investment goods. For these reasons, all residential construction is considered an investment." Page 126 McConnell K.R., Brew S.L. “Economics: principles, problems and politics: trans. 17th English Ed. - M.:INFRA-M, 2009. - XXXVIII, 916c";
b change in the amount of reserves.
The increase is an “unconsumed product,” which essentially confirms that this is an investment.
Now we have an idea of exactly what an investment is, but it is also very important to understand what it is not. Investments do not include:
b transfer from hand to hand valuable papers(shares, bonds);
b re-sale of physical assets (houses, jewelry, etc.).
Transactions of this kind mean nothing more than. Transfer of ownership rights to existing assets. “Investment is the construction of either new capital assets, i.e. assets that create new jobs and generate income. This does not happen by simply exchanging (or selling) existing capital assets.” Page 127, McConnell KR, Brew SL. “Economics: principles, problems and politics: trans. 17th English Ed. - M.:INFRA-M, 2009. - XXXVIII, 916c";
To denote gross private domestic investment we will use the symbol I
· Government procurement G.
Government spending on consumer goods includes:
b Expenditures on goods and services that authorities consume when creating public goods;
b Expenses for social capital(schools, highways), serving the community for a long time. Expenses of government authorities (federal, regional and local) include all expenses for the purchase of the final product of firms and for all direct purchases of resources, including labor. (However, this does not include all government transfer payments, since such expenses are not related to current production)
To denote government procurement we will use the symbol G.
· Net exports Xn.
“A significant share in the overall indicators national income enter into international trade transactions. We know that GDP takes into account all goods and services produced in the United States, including what people in other countries spend on products. USA. Therefore, when the expenditure approach is used to determine GDP, we must also take into account the value of exports.
At the same time, we know that Americans spend large amounts money for imports, i.e. goods and services produced and provided abroad. These expenses are shown in the GDP (GDP) of other countries. Therefore, we must subtract import values from U.S. expenditures to avoid overstating the total output of the United States.
Instead of adding exports and then subtracting imports, economists use “exports minus imports,” or net exports, when calculating national income.” Page 128, McConnell KR, Brew SL. “Economics: principles, problems and politics: trans. 17th English Ed. - M.:INFRA-M, 2009. - XXXVIII, 916c";
Then the formula is obtained: Net exports (Xn) = Exports (X) - Imports (M)
Real and Nominal GDP
GDP shows the market value of all final goods and services produced during the year. Naturally, all goods and services are very heterogeneous, and in order to aggregate them into one indicator, monetary values are used as a common measure. However, this approach has disadvantages: how to compare market values of GDP from different years, since the value of money itself can change due to inflation or as a result of deflation.
You should deflate GDP when prices rise and inflate when prices fall. This method allows you to estimate GDP for different years as if the general price level and the value of the dollar remained unchanged compared to the base period.
Nominal (unadjusted) GDP is the value of GDP that reflects the prevailing price level during the period of production of goods.
And real (adjusted) GDP is the value of GDP that has been deflated or inflated to account for changes in the price level.
The purpose of the lesson: teach students to calculate the main indicators of the system of national accounts.
Students should know: indicators of the system of national accounts “gross domestic product”, “net national product”, “national income”, “personal income”, “personal disposable income”. Difference between gross domestic product (GDP) and gross national product (GNP). Methods for calculating gross domestic product. Formulas for calculating real and nominal GDP, GDP deflator.
Students should be able to: analyze statistical data on main macroeconomic indicators. Calculate GDP using different methods using conditional examples. Calculate real and nominal GDP, GNP deflator, net national product, national income, personal income, personal disposable income using conditional examples.
Lesson plan:
- Explanation of the concepts of gross domestic product and gross national product - 10 min.
- Calculation of GDP by different methods, net national product, national income, personal income, personal disposable income - 15 min.
- Calculation of real and nominal GDP, GNP deflator – 15 min.
- Test 3 min.
- Homework – 2 min.
Lesson Description:
1. Definition.
One of the main macroeconomic indicators that evaluate the results of economic activity is gross domestic product (GDP) and gross national product (GNP).
GDP is market price all final goods and services produced in the country during the year, regardless of whether the factors of production are owned by residents of the country or owned by foreigners (non-residents).
GNP is the market value of all final goods and services produced in a country during the year. GNP measures the value of products created by factors of production owned by citizens of a given country (residents), including in the territory of other countries - this is called net factor income.
GNP = GDP + net factor income.
Net factor income from abroad is equal to the difference between the income received by citizens of a given country abroad and the income of foreigners received in the territory of a given country.
Our country's GDP in 2003 was 9.3 trillion. rub.
By dividing GDP of countries s by the number of its citizens, we get an indicator called “GDP per capita”. The higher the GDP per capita, the higher the standard of living in the country.
Final goods and services are those that are purchased during the year for final consumption and are not used for intermediate consumption (that is, in the production of other goods and services).
GDP does not include the costs of purchasing goods produced in previous years (for example, buying a house built five years ago), as well as the costs of purchasing intermediate products (raw materials, materials, fuel, energy, etc., used to produce final products). products).
For example, food prepared at home and in a restaurant may be exactly the same, but only the cost of the latter is included in GDP. A servant and a housewife can do the same work, but only the servant's wages will be included in the GDP. The volume of production in the shadow economy is not taken into account in GDP.
Example: “A tire production company sells 4 tires worth 4,000 rubles to a car manufacturing company.
Another company sells a player to a car company for 3,000 rubles. Having installed all this on a new car, the car company sells it to consumers for 200,000 rubles. What amount will be included in the calculation of GDP?”
Answer: GDP will include the cost of the final product - a finished car, 200,000 rubles. The cost of tires and player is included in the intermediate product. If the player was purchased in a store for your own use. Its value would be included in the GDP of that year.
2. When calculating GDP should be based on following conditions. Everything that is produced in the country will be sold. Therefore, you can simply calculate how much consumers - the end users of manufactured products - spend on their purchase. Thus, we can imagine GDP as the sum of all expenses necessary to buy the entire volume of production on the market.
You can look at the same problem from the other side. What consumers spend on goods. Received as income by those who participated in their production. Income from the sale of manufactured goods is used to pay wages workers, rent to the owner of the land (if the enterprise is located on land owned by another owner), interest on loans received from the bank, profit - income of the owner of the company.
In accordance with this approach, there are two ways to calculate GDP:
a) on expenses;
b) by income.
When calculating GDP by expenditure, the expenditures of all economic agents: households, firms, government and foreigners (expenses on our exports). Total expenses consist of:
- personal consumer expenses, including household expenses on durable goods and current consumption, on services, but not including expenses on the purchase of housing;
- gross investment, including industrial capital investment, or investment in fixed assets, investment in housing construction, investment in inventories.
- public procurement of goods and services, for example, for the construction and maintenance of schools, roads, the maintenance of the army and the state apparatus. This does not include transfer payments (benefits, pensions, social security payments);
- net exports of goods and services abroad, calculated as the difference between exports and imports.
GDP by expenditure = P + I + G + (Exp. - Imp.)
(Gross investment - depreciation = net investment).
When calculating GDP by income, all income received by residents of the country from production (wages, rent, interest, profits), as well as two components that are not income, are summed up: depreciation deductions and indirect business taxes.
GDP by income = salary + rent + dividends + interest + depreciation + indirect taxes
Profit for calculating GDP includes: income tax, retained earnings and dividends.
Personal income = salary + rent + dividends + interest
Personal disposable income = personal income – individual taxes + transfers
Net national product = GNP - depreciation
National income = net national product – indirect taxes
Task. Based on data characterizing the state’s economy (in trillion rubles), calculate the value of GDP based on income and expenses:
| Measuring GDP by expenditure | Measuring GDP by income | ||
| Personal consumption expenses | 230 | Depreciation | 35 |
| Export | 37 | Dividends | 15 |
| Import | -33 | Indirect taxes | 20 |
| Investments | 50 | Income tax | 10 |
| Government procurement of goods and services | 70 | Retained earnings of firms | 10 |
| Wage | 220 | ||
| Interest | 35 | ||
| Rent | 9 | ||
| TOTAL GDP by expenditure | 354 | Total GDP by income | 354 |
GDP = 825 + 224 + (302 – 131) + (422 – 410) = 1232
GNP = GDP + NFA = 1232 + 15 = 1247
NNP = GNP – (gross inv. – net inv.) = 1247 – 26 = 1221
ND = ChNP – indirect taxes = 1221 – 107 = 1114
3. Nominal GDP(GNP) is calculated in current year prices, and real GDP is calculated in comparable (i.e., constant, basic) prices.
Real GDP = Nominal GDP / Price Index
The best known price index is the GDP deflator.
GDP deflator = total cost set of goods of the current period in prices of the current period / Total cost of a set of goods of the current period in basic prices * 100%
GDP deflator = Nominal GDP / Real GDP * 100%
Task: Suppose that 3 goods are produced and consumed in the economy. Calculate the GDP deflator for 1992.
Answer: GDP deflator = 8 15 + 7 34 + 5 1425 / 8 10 + 7 27 + 5 655 * 100% = 211%
There was an increase in prices in 1992. compared to 1982
Task: The table shows the values of the GDP deflator as of December 31 of the corresponding year.
Year GDP deflator 0 (basic) 1,00 1 1,15 2 1,25 3 1,33 4 1,40 5 1,50 6 1,64
Answer: The inflation rate is the percentage by which prices change over the year.
Year Inflation rate (annual) 0 (basic) Cannot be determined 1 15% 2 8,70% 3 6,40% 4 5,26% 5 7,14% 6 9,33%
1 year: 1.15 – 1.00 / 1.00 * 100% = 15%
Year 2: 1.25 – 1.15 / 1.15 * 100% = 8.70%
Year 3: 1.33 – 1.25 / 1.25 * 100% = 6.40%
Year 4: 1.40 – 1.33 / 1.33 * 100% = 5.26%
Year 5: 1.50 – 1.40 / 1.40 * 100% = 7.14%
Year 6: 1.64 – 1.50 / 1.50 * 100% = 9.33%
GDP deflator (for year 6) = Nominal GDP / Real GDP = 1.64
Which of the following types of income are taken into account when calculating GDP:
a) the pension of a former factory worker;
b) painting work of a painter own home;
c) the income of a dentist engaged in private practice;
d) monthly Money transfers, received by the student from home;
f) purchase of 100 shares of Mosenergo
When calculating GDP for a given year, the following are taken into account:
a) the sum of all money received by citizens of the country in a given year;
b) the market value of all final goods and services produced during the year;
c) the amount of state income and expenses;
d) the cost of raw materials and supplies consumed by enterprises in a given year.
Nominal GDP amounted to 1250 billion rubles, and real GDP – 1000 billion rubles. Then the GDP deflator index is equal to:
a) 25%;
b) 80%
c) 125%
d) 225%
Homework:
Solve the problem: “Nominal GDP in 1994 (base) amounted to 400 billion rubles. and in 1995 – 440 billion rubles. Index – GDP deflator 1995 was equal to 125%. How did real GDP in 1995 change compared to real GDP in 1994?
- According to the conditions of the problem, 1994 is the base year, which means that nominal and real GDP for it coincide, i.e. real GDP 1994 equal to 400 billion rubles.
- Real GDP 1995 can be found by dividing nominal GDP by the index - the 1995 GDP deflator:
- Real GDP 1995 = 440 billion rubles. / 125% * 100% = 352 billion rubles.
Real GDP has decreased compared to 1994.
It is quite difficult for an ordinary person without an economic education to understand what GDP is. In economics, this indicator plays a very important role. Based on it, you can assess the level economic development state and its competitiveness in the international market.
Gross domestic product (GDP) is the totality of all goods (goods and services) produced by residents in a particular country during the year, expressed in prices of the final product.
Simply put, gross domestic product is the total quantity of all goods and services produced by all enterprises and organizations of the country during a certain period. reporting period(most often the calendar year is assessed).
in economics?
This indicator is very important when assessing the efficiency of the country’s economy. Gross domestic product characterizes the growth rate and level of its development. Often, the GDP indicator is used to assess the standard of living of the population of a state. The higher this indicator, the higher the standard of living is considered (there is indeed a connection between the indicators, but other, more specific economic indicators should also be used).
Nominal and real gross domestic product
The GDP indicator can be of two types:
- Nominal (calculated in prices of the current period).
- Real (calculated in prices of the comparable previous period). Most often, prices from the previous year are used for comparison.
The calculation allows us to neutralize the impact of price increases on this indicator and determine net increase state economy.
Most often, GDP is calculated in national currency, however, if there is a need to compare the corresponding values different countries, it is allowed to transfer it into another currency according to the relevant exchange rates. Global GDP growth is as follows (2013).
Income (distribution) method of calculating GDP
What is GDP in economics? This is, firstly, an indicator based on an assessment of the profitability of the owners. The calculation is carried out by summing them up. At the same time, the amount of GDP includes the following components:
- W- total amount wages paid to all employees of the country (both residents and non-residents);
- Q - amount of deductions for social insurance population;
- R - profit (gross);
- P - mixed income (gross);
- T - taxes (import and production).
Thus, the calculation formula looks like: GDP = W + Q + R + P + T
Consumable (production) method
The country's population, in the course of their labor activity, produces different types and forms final product(meaning specific goods or services that have a certain cost). It is the total expenditure of the population on the purchase of final products of labor activity that will constitute the gross domestic product. When calculating GDP manufacturing The method summarizes the following indicators:
- C - expenditures of the country's population for consumer needs;
- Ig - private investment injections into the country's economy (gross);
- G - government procurement (purchase of goods and services by the state)
- NX - net exports (the difference between government exports and imports).
GDP is calculated using the formula: GDP = C + Ig + G + NX
Calculation based on added value
The Institute of Economics allows the calculation of the amount of GDP using value added. This technique allows you to obtain the most accurate GDP indicator, since it discards intermediate products that could mistakenly be counted as final products in the previously discussed methods. That is, the use of value added calculation eliminates the possibility of double counting. By summing up the indicators of all goods and services in a country, GDP can be reliably calculated. This is because value added is the market value of the product minus the cost of materials and raw materials purchased from suppliers.
GDP per capita
One of the most significant and indicative indicators of the level of development of the state’s economy. It is determined by dividing the overall GDP indicator by the number of residents of the country and shows how many products were produced over a certain period on average for each resident of the state. This indicator is also called “per capita income”.
Another frequently used indicator of economic development is one that summarizes the final product produced both within the country and abroad. The main condition is that the manufacturer of the products are residents of a given state.
We have already studied what GDP is in the economy and its role in the analysis of ongoing changes. So what are the real GDP indicators of the countries of the world today?
Rating of countries by nominal GDP
This rating was compiled based on nominal GDP converted into dollars at the market (or established by the authorities) exchange rate. World economy is designed in such a way that this indicator developing countries somewhat underestimated, while in developed ones it is overestimated. This is due to the fact that the difference in the cost of similar products in different countries is not taken into account.
So, the top ten, according to the IMF for 2013, looks like this:
Country ranking by per capita
The level of GDP per capita is indicative, but not the most accurate indicator characterizing the economy, since it does not take into account the specifics of sectoral development of the economy, the costs of production, its quality, as well as other no less important elements economic system.
The list of 10 countries with the highest level of GDP per capita, according to the IMF for 2013, looks like this:
The problem of slowing economic growth in Russia
Global crisis processes, as well as a number of subjective economic factors caused the Russian economy to weaken somewhat in 2013-2014. GDP, accordingly, grew at an extremely low rate. So, according to Alexey Ulyukaev, who holds the position of Minister of Economic Development Russian Federation, 2013 was the worst year for the Russian economy since the crisis year of 2008. During this period it did not increase at the same pace as expected. Thus, the expected GDP growth rate was reduced by the department from 3.6% at the beginning of the period to 2.4% in June and, finally, 1.4% in December.
The situation in industry also remained deplorable. While the mining sector still showed a slight increase, the manufacturing sector even showed some decline. Inflation also reached 0.5% higher than expected.
Causes of crisis phenomena in the Russian economy
Thus, one can see signs of stagnation in the Russian economy. There are objective reasons for this, which can be divided into 2 groups: internal and external.
Internal factors
External factors
- General economic downturn in Europe. The development of the world economy is cyclical and is accompanied by recessions and upswings.
- Decrease in exports (both in value and physical terms). Called as European economic recession, and the exhaustion of the raw materials model for the development of the national economy.
Thus, to overcome the crisis in the economy it is necessary to reorient industry, improve the investment climate, and also hope for an improvement general trends in the global economy.
Gross Domestic Product (abbreviated GDP) is the main macroeconomic indicator. It is by this that one judges the development of a country, its influence on the world economy and investment attractiveness. Gross domestic product shows the size of the national economy, and its structure shows the ratio of industries and their productivity. This is why it is so important to understand the methods for calculating GDP. We will consider three main ones.
Term and its definition
Before we move on to what methods of calculating GDP exist, it is logical to dwell on what this indicator is. Gross domestic product is an aggregate measure of production equal to the sum of value added created by all residents and institutional units engaged in economic activity(plus taxes and minus subsidies). This definition is given by the Organization for Economic Co-operation and Development (abbreviated as OECD). It unites developed countries with representative democracy and free market type management. It was originally created as part of the Marshall Plan to coordinate various US projects for the post-war reconstruction of Europe.
General information
GDP calculation methods are usually used to assess the economic performance of an entire country or a specific region. It can also be used to measure the relative contribution to national economy the industry in question. This is possible because the sum of all value added is GDP. The formula for calculating the indicator is not based on sales. It takes into account the difference between the cost of factors of production and finished products. For example, a company buys steel and produces a car. If methods for calculating GDP were based on market prices, double counting would arise. Since gross domestic product is the sum of value added, it also increases when a company reduces the consumption of materials and other resources (so-called intermediate consumption), while continuing to produce the same volume of output.
Most common application of GDP is a calculation of economic growth from year to year (more recently, quarterly). The Gross Domestic Product graph shows the successes and failures of a national government's policies. Moreover, it can always be used to tell what stage of the cycle the economy is at: growth, peak, recession, depression.
Determination methods
GDP can be determined by three methods. Each of them should give the same result. Highlight production method calculating GDP (by value added), by income and by expenditure. The simplest is the first method. It follows logically from the definition. But its use is associated with data collection problems, which we will discuss later. The calculation of GDP by expenditure is based on the assumption that all products produced must be purchased by someone. This means that the amount of added value must be equal to the waste of the subjects. Calculating GDP by income works on the principle that each factor contributes to the creation finished goods. Net imports should also be taken into account. Therefore, GDP must be equal to the sum of the incomes of all producers.
By added value
The second name for this method is the production method of calculating GDP. This approach reflects the OECD definition of the term. Since the sum of value added created by all residents and institutional units in a country is GDP, the calculation formula is as follows: the difference between the total value of output and intermediate consumption. To measure gross domestic product, all economic activities are classified into different sectors. After this, the performance of each of them is assessed using one of the methods:
- Multiplying output in each sector by market prices it also contains the addition of the resulting results.
- Collection of statistics on total sales and inventories from the balance sheets of enterprises and their summation.
Subtracting intermediate consumption gives GDP at factor cost. In this case, each sector must be taken into account. Value added plus taxes and minus subsidies is GDP at producer prices.
Calculation of GDP by expenditure
In economics, most things are produced for sale. Therefore, the amount of money spent on goods and services can be used to estimate GDP. The formula in this case includes the following components:
- Consumption.
- Investment.
- Government spending.
- Export.
- Import.
GDP is equal to the sum of the first four components minus the last. An alternative formula includes final consumption expenditure, gross fixed capital formation, and net exports.
Calculation of GDP by income
The number that is obtained using this method, must be equal to the previous ones. However, in practice, statistical errors often occur that lead to minor differences. Income is usually divided into five categories:
- Salaries, additional labor money.
- Corporate income.
- Interest and profit from investment.
- Farmers' income.
- Profit of unincorporated business.
GDP is equal to the sum of these five categories minus depreciation.
Historical reference
William Petty came up with the basic concept of GDP to protect landowners from unfair taxation during the Anglo-Dutch Wars of 1652-1674. The method was developed by mercantilist Charles Davenant. The modern concept of gross domestic product was first developed by Simon Kuznets for a report to the US Congress in 1934. American economist Ukrainian origin and Nobel laureate Already then he warned about problems with use this indicator to measure well-being.
However, after the Bretton Woods Conference in 1944, GDP became the main means of assessing national economies. At that time, the more common measure was the gross national product (abbreviated GNP). Its main difference from GDP is that it measures the production not of enterprises and resident individuals, but of citizens and national firms, regardless of where they operate. The widespread expansion of gross domestic product began in the 1980s. British economist Angus Maddison, a specialist in quantitative macroeconomic history, calculated the GDP of countries back to 1830.
Real and nominal indicators
To calculate GDP, both market prices and base prices can be used. Nominal gross domestic product represents the value of final goods and services produced within a nation's territory. As a result, it is dependent on inflation. Its presence leads to an inevitable increase in the indicator. Deflation, on the contrary, causes a decrease in GDP. Calculating real GDP involves taking into account only real production growth. It can be expressed either in the prices of the previous year or in any other year that they decided to take as a basis. The ratio of nominal and real GDP is called the deflator.
Data collection problems
The calculation of GDP indicators is carried out on the basis of statistical information for the country. If the added value created by firms is quite easy to take into account, then with the public sector, financial industries that deal with production intangible assets everything is much more complicated. Nevertheless, it is the activities of these sectors that play a significant role in national economy developed countries. International conventions that guide organizations and statistical offices must constantly change to keep GDP calculations up to date. The Gross Domestic Product indicator is the result of an analysis of extensive statistical data that is built into a conceptual measurement framework.