The Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country during a certain time period. It is the total output of all economic activity in a country over a given period.
- A country’s GDP will include domestic output by foreign owned firms.
- It does not include the sale or resale of goods produced in previous periods.
- It does not include transfer payments by government such as unemployment, retirement, etc., since they are not considered economic outputs.
- It considers the market value of final goods and services. So, the intermediate goods and services will not be separately added in GDP calculation. Their value will be included only in the price of the final product.
- GDP includes the value of goods and services provided by the government also; for example, police, administration, judicial system, etc. are all services whose value is included in GDP.
- It includes the value of self-occupied housing as well as the value of rental housing.
- GDP is the total output of all economic activity in a country over a given period and a country’s GDP will include domestic output by foreign owned firms.
- Nominal GDP = GDP in current prices
- A price deflator must be applied to the current GDP in order to compare current GDP to the GDP of a prior year.
There are two approaches to calculate GDP: Income Approach and Expenditure Approach.
Income Approach
Under this approach, the GDP is calculated as the total income earned by households and businesses in the country during a given time period.
Expenditure Approach
Under this approach, GDP is calculated as the total amount spent on goods and services produced in a country during a time period.
Both these approaches should produce the same result as in the whole economy the total expenditure and total income should be equal.
