Gross domestic product: what is GDP and how is it calculated?

What is GDP?

The Gross Domestic Product (GDP) corresponds to the set of all goods and services produced within the borders of a region or country.

This sum takes into account all production during a period, usually a year, and the result can be analyzed for the macroeconomic situation of the country.

In addition, the goods and services produced are not considered intermediaries, which serve to produce other goods, or products that already exist, as in the sale of used cars, for example.

When the total value of the product is divided by the number of inhabitants of the country or region, it is known as  GDP per capita  , which can indicate the quality of life in each economy.

How GDP is measured

To measure GDP, it is possible to analyze the product by three means that demonstrate the same value for wealth that was generated by the agents in the economy: expenditure, income or production.

GDP measured by spending

From this point of view, the value of the product is measured through all the expenses made by the different agents of the economy, considering:

  • C – consumer spending that occurs through families;
  • G – spending that occurs when the State makes public spending;
  • I – expenditure on investments made by companies;
  • X – export expenses through foreigners;
  • Q – import expenses incurred by agents in the economy.

Through this view, a large sum of all expenses within the analyzed period is listed, as in the formula:

GDP = C + G + I + X – Q

Imports (Q) appear in the formula as a deduction for agents’ expenses on products and services that originate abroad and do not count as a domestic product.

GDP measured by income

In this sense, the income generated and distributed to economic agents during the period is considered.

With the production of companies, for example, the factors are remunerated and they generate income to the workers through wages. Therefore, the following are considered in this calculation:

  • S – income through wages;
  • R – income through leases;
  • L – benefit of benefits;
  • J – income attributed to interest;
  • A – depreciation income;
  • T – income to the State through indirect taxes, less subsidies to production (Z).

The formula results in a general sum of all income generated in the period:

GDP = S + R + L + J + A + (T – Z)

In addition to being considered as public income, with the sum of indirect taxes, GDP is now at market prices, considering the production available for the market.

GDP measured by production

According to this opinion, GDP is measured directly by the production of economic agents that is sold in the market for goods and services.

The measurement method considers the sum of all gross value added (GVA) during the period, plus taxes collected on final sales, less subsidies granted:

GDP = ΣVAB + Taxes on products and services net of subsidies

The method through value added allows that there is no multiple count in the production and distribution of goods, as can be seen in the following example for the production that results in the production of bread.

Phases of the production process.Final product (per thousand kg)value added
Wheat extraction$ 15.00$ 15.00
Flour production$ 33.50$ 18.50
Bread production$ 49.00$ 15.50
Total = $ 49.00

In this case, if there were a double count, the GDP of this production would be overvalued by a final product that would reach $ 97.50 since it would be added to the method.

Nominal GDP and real GDP

By obtaining the value of the Gross Domestic Product that was measured, it is possible to start doing analysis on the growth of the product in the economy, and for that, the study is better with the real GDP analyzed.

The nominal GDP is the value analyzed considering the current prices of the calculated period, and, in case of high prices, it is possible that the product has not really grown.

For this, it is necessary to consider real GDP, which is the product where prices are set in a base year, and the quantity produced in the current year.

The division of nominal GDP by real GDP results in a deflator that serves as a choice for the value of the country’s price index.

Difference between GDP and GNP

The GDP differs from the Gross National Product (GNP) in terms of what is considered the economic space and the economic agents of the country or region.

For GDP, production within the economic territory is considered, regardless of whether it comes from multinational companies established in the country.

On the contrary, the GNP considers the production of economic agents in the country, even for companies of goods and services that are installed in other countries.

In the case of Brazil, for example, GDP quantifies the wealth generated by all who reside in the country, regardless of their nationality, while GNP shows the wealth generated by national agents, regardless of where they produce.