How do you calculate GDP?

Definition

Gross Domestic Product (GDP) measures the total monetary value of all final goods and services produced within a country's borders in a specific time period. It is a key indicator of a country's economic performance.

There are three main approaches to calculating GDP:

1. Expenditure Approach:

$$ \text{GDP} = C + I + G + (X - M) $$
where:

• $C$ = Consumption
• $I$ = Investment
• $G$ = Government Spending
• $X$ = Exports
• $M$ = Imports
• Income Approach:

Sum of all incomes earned (wages, rents, interests, profits).

• Production (Output) Approach:

Sum of value added at each production stage.

Worked Example

Suppose in a given year, a country has the following data (in billions):

Calculate GDP using the expenditure approach:

\[\begin{align*} \text{GDP} &= C + I + G + (X - M) \\ &= 500 + 200 + 150 + (100 - 80) \\ &= 500 + 200 + 150 + 20 \\ &= 870 \end{align*}\]

GDP = $870 billion

Key Takeaways