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GDP formula helps to calculate and understand the growth or fall of an economy. GDP also known as Gross Domestic Product represents the total value of all the finished goods and services produced within the domestic boundaries of a place over a specific period of time. It is usually calculated annually. GDP can be used by economists to determine whether an economy is growing or in a slump.
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Key Takeaways: GDP formula, Gross domestic product, Expenditure method, Income method, Output method
What is Gross Domestic Product?
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GDP is used as an economic metric and is, therefore, used throughout the world as the main course of output and economic activity. It is the total market value of all the finished goods produced within the country in a given year; it excludes goods and services imported from other countries.
Also Read: Discount Formula
Methods For Calculating GDP
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The GDP, or Gross Domestic Product, can be calculated using one of these three major methods, which are listed below:
- Expenditure approach
- Income approach
- Output approach
Expenditure Method
This is the most often used technique for calculating a country's GDP, which is based on expenditures rather than income and is incurred by all citizens inside the country's territorial limits on a variety of goods and services. This strategy will result in a nominal GDP. Here's how to calculate it:
GDP = C + I + G + (X − M)
here,
C = Total Consumption spending
I = Total Investment
G = Total Government spending
X = Exports
M = Imports
C: It refers to the total amount spent by all consumers on products and services such as food, transportation, clothing, and gasoline.
I: Investment Expenditure refers to money spent by people on commercial operations such as purchasing plants and machinery, purchasing land, and so on.
G: The government's expenditure on different developmental endeavors.
(X-M): It stands for net exports, which are calculated by subtracting total imports from total exports.
Income Method
In the entire economy, this method covers all income earned by factors of production that are inputs in the process of producing final goods or services. Land, labor, capital, and management/entrepreneurship are the components of production, while the sources of revenue are rent, wages, interest, and profits, respectively. The aggregate of all of these earnings will be referred to as GDP. The GDP formula, often known as the GDP equation, is as follows:
Net National Income = Wages + Rent + Interest + Profits
This will be the Net National Income, and we will need to make additional changes to get to the Gross National Income. The formula for calculating GDP is as follows:
GDP = Compensation of employees + Rental and royalty income + Business cash flow + Net interest
or
GDP = C + I + G + X – M = W + P + In + R
Output Method
The output approach is also known as a value-added approach since it considers the value-added at various stages of the final product's production process. To compute GDP at market price, the gross value added of all three sectors, namely primary, secondary, and tertiary, is calculated. The following formula may be used to determine the gross value added:
GDP = GDPmp of primary sector + GDPmp of secondary sector + GDPmp of tertiary sector
GDPmp (for all the sectors is calculated as) = Sales + Change in stock – Intermediate consumption
Also Read: Disposable Income Formula
Things to Remember
- Gross Domestic Product or GDP represents the total value of all the finished goods and services produced within the domestic boundaries of a place over a specific period of time.
- The Three methods of calculating Gross Domestic Product are expenditure approach, income approach and output approach.
- Expenditure approach: GDP = C + I + G + (X − M)
- Income approach: GDP = C + I + G + X – M = W + P + In + R
- Output approach: GDP = GDPmp of primary sector + GDPmp of secondary sector + GDPmp of the tertiary sector
Also Read:
Sample Questions
Ques. Calculate the net value added at the market price of a firm: (All India 2009) [3 marks]
Ans:
| Items | Amount |
|---|---|
| Sale | 400 |
| Change in stock | -20 |
| Depreciation | 30 |
| Net indirect taxes | 40 |
| Purchase of machinery | 200 |
| Purchase of an intermediate product | 250 |
Value of output = Sale + Change in stock
= 400 + (-) 20
= 380
Gross value added at market price = Value of output – Purchase of an intermediate product
= 380 – 250 = 130/-
Net value added at market price = Gross value added at market price – Depreciation
= 130 – 30 = 100/-
Thus, the net value added at the market price of the firm = âÂ\(\Box\)¹ 100/-
Ques. Calculate the nominal income and private income from the following data. (Delhi 2010) [3 marks]
Ans:
| Contents | In crores |
|---|---|
| Net current transfers from the rest of the world | 10 |
| Private final consumption expenditure | 600 |
| National debt interest | 15 |
| Net exports | -20 |
| Current transfers from the government | 5 |
| Net domestic product at factor cost accruing to the government | 25 |
| Government final consumption expenditure | 100 |
| Net indirect tax | 30 |
| Net domestic capital formation | 70 |
| Net factor income from abroad | 10 |
National income = [ Private final consumption expenditure + Government total consumption expenditure + Net domestic capital formation + Net exports + Net factor income from abroad or imports – Net indirect tax ]
= 600 + 100 + 70 + (-20) + 10 – 30
= 780 – 50
= 730 crores
Nominal or National Income = 730 crores
Private income = [ Net National Profit – Net domestic product at factor cost accruing to government + Transfer payments + National debt interest ]
= 730 – 25 + (10+5) + 15
= 760 – 25
= 735 crores
Private income = 735 crores
Ques. Explain the meaning of Real Gross Domestic Product and Nominal Gross Domestic Product, using a numerical example. (CBSE 2019) [3 marks]
Ans: Real GDP is the value of current income at base-year prices whereas Nominal GDP, is the value output or income at current year prices. Given nominal income, real income can be calculated as:
Real GDP = Nominal GDP Price Index ×100
Suppose in the year 2012, a country produced 100 units of bread and the price was âÂ\(\Box\)¹ 11 per bread. So, the GDP at the current price or Nominal GDP was 100 x âÂ\(\Box\)¹ 11 = âÂ\(\Box\)¹ 1,100.
In 2013, the same country produced 110 units at âÂ\(\Box\)¹ 15 per bread. Therefore, the nominal GDP was 10 x âÂ\(\Box\)¹ 15 = âÂ\(\Box\)¹ 1,650. However, Real GDP in 2012 calculated at the base year price will be 110 x âÂ\(\Box\)¹11 = âÂ\(\Box\)¹1, 210.
Ques. Calculate net value added at market price of a firm: [3 marks]
Ans:
| Items | Amount |
|---|---|
| Sale | 300 |
| Change in stock | -10 |
| Depreciation | 20 |
| Net in direct taxes | 30 |
| Purchase of machinery | 100 |
| Purchase of intermediate product | 150 |
Value of output: - Sale + Change in stock (300+ (-) 10 = 290/-)
Gross Value added at MP= Value of output - Purchase of intermediate product.
290 - 150 = 140/-
Net Value added at MP = Gross Value added at MP - Depreciation
140 - 20 = 120/-
Thus, the final answer is Rs. 120.
Ques. Calculate national income and gross national disposable income from the following data: [5 marks]
Ans:
| S.No | Contents | Rs. (in crores) |
|---|---|---|
| 1 | Net indirect tax | 05 |
| 2 | Net domestic fixed capital formation | 100 |
| 3 | Net exports | (-) 20 |
| 4 | Government’s final consumption expenditure | 200 |
| 5 | Net current transfers from abroad | 15 |
| 6 | Private final consumption expenditure | 600 |
| 7 | Change in stock | 10 |
| 8 | Net factor income from abroad | 05 |
| 9 | Gross domestic fixed capital formation | 125 |
Putting the equation together
Net national income (NNPFC) = Net disposable income (NNDPM)
= (Government total consumption expenditure + private total consumption
expenditure + net domestic fixed capital formation + net exports)
= 200 + 600 + 100 + 10 + (-) 20
= 910 – 20 = 890
So NDP MP = 890 crores
NNPFC = NNDPM + (Net factor income from abroad – Net indirect tax)
= 890 + 5 – 5
Therefore, NNPFC = 890 crores
Depreciation = (Gross domestic fixed capital formation - Net domestic fixed
capital formation)
= 125-100= 25 crores
GNDI = (NNPFC + Net indirect tax + Net current transfers from abroad +
Depreciation)
= 890 + 05 + 15 + 25
The gross national disposable income is 935 crores
Ques. Define budget deficit and trade deficit. The excess of private investment over saving of a country in a particular year was Rs 2,000 crores. The budget deficit was (-) Rs 1,500 crores. What was the volume of the trade deficit of the country? [4 marks]
Ans: Budget Deficit
The excess of government expenditure over government income is termed as budget deficit.
Budget Deficit = G – T
Where,
‘G’ represents government net expenditure
‘T’ represents government net income
Trade deficit measures the excess of import expenditure over the export revenue of a country.
Trade Deficit = M – X
Where,
‘M’ represents expenditure on imports
‘X’ represents revenue earned by exports
It is given that,
I – S = Rs.2000 crores.
G – T = (-) Rs.1500 crores.
Therefore,
Trade deficit = [I – S] + [G – T]
= 2000 + [-1500]
= Rs.500 crores.
Ques. Calculate NNP at market price by production method and income method. (4 marks)
Ans:
| S.No | Contents | Rs. (in crores) |
|---|---|---|
| 1 | Intermediate consumption Primary sector Secondary sector Tertiary sector | 500 400 300 |
| 2 | Value of output of Primary sector Secondary sector Tertiary sector | 1000 900 700 |
| 3 | Rent | 10 |
| 4 | Emoluments of employers | 400 |
| 5 | Mixed income | 650 |
| 6 | Operating surplus | 300 |
| 7 | Net factor income from abroad | -20 |
| 8 | Interest | 05 |
| 9 | Consumptive of fixed capital | 40 |
| 10 | Net indirect tax | 10 |
- Using the Production Method: Value added at MP = Value of output - Intermediate consumption
= (1000 + 900 + 700) – (500 + 400 + 300)
= 2600 - 1200
Hence GDPMP = 1400 crores
NNPMP = GDPMP - (Consumptive of fixed capital + Net factor income from
abroad)
= 1400 – 40 = (-20)
NNPMP is equal to 1380 crores
- Using the Income Method: NNPMP = Emoluments of employers + Mixed income + Operating surplus + Net indirect tax + Net factor income from abroad
= 400 + 650 + 300 + 10 + (-20)
NNPMP = 1350 + 10 - 20
= 1340 crores
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