Gross Domestic Product (GDP) can be calculated using three main approaches, all of which should theoretically yield the same result:
1. Expenditure Approach
This is the most common method and calculates GDP by adding up all expenditures made by the final users of goods and services in the economy. The formula is:
GDP=C+I+G+(X−M)\text{GDP}=C+I+G+(X-M)GDP=C+I+G+(X−M)
Where:
- C = Consumption (private consumer spending)
- I = Investment (business investments and residential construction)
- G = Government spending (expenditures on goods and services)
- X = Exports (goods and services sold abroad)
- M = Imports (goods and services bought from abroad)
Net exports (X - M) represent the value of exports minus imports
2. Production (Output or Value-Added) Approach
This method sums the value added at each stage of production across all industries. It is calculated as:
GDP=Gross Value of Output−Value of Intermediate Consumption\text{GDP}=\text{Gross Value of Output}-\text{Value of Intermediate Consumption}GDP=Gross Value of Output−Value of Intermediate Consumption
This approach avoids double counting by excluding intermediate goods and only counting the final value added by producers
3. Income Approach
This calculates GDP by summing all incomes earned by factors of production in the economy, including wages, rents, interest, and profits. Adjustments are made for taxes less subsidies and depreciation:
GDP=Wages+Rents+Interest+Profits+Taxes−Subsidies+Depreciation\text{GDP}=\text{Wages}+\text{Rents}+\text{Interest}+\text{Profits}+\text{Taxes}-\text{Subsidies}+\text{Depreciation}GDP=Wages+Rents+Interest+Profits+Taxes−Subsidies+Depreciation
This approach reflects the total income generated by production
. In summary, the most straightforward formula used in practice is the expenditure approach:
GDP=C+I+G+(X−M)\boxed{ \text{GDP}=C+I+G+(X-M) }GDP=C+I+G+(X−M)
This formula adds consumption, investment, government spending, and net exports to calculate the total economic output of a country
