GDP – How Gross Domestic Product is measured

GDP or Gross Domestic Product is an indicator to measure the economic production and growth of a country. The term “Domestic” used in Gross Domestic Product indicates that it measures production that takes place within the country’s border.

Economist suggests GDP as a best measure to understand a country’s economy. In this article, we have tried to help you in understanding how gross domestic product or GDP is measured for a country.

GDP or Gross Domestic Product measures the total rupee value of all goods and services produced over a specific time period by the economy. Generally, it is compared by year on year rise in Gross Domestic Product.

How Gross Domestic Product or GDP is measured

GDP – How Gross Domestic Product is measuredGross Domestic Product is measured by using either income approach or expenses approach. Under income approach, Gross Domestic Product is calculated by adding employee’s salary and wages, profit of companies, income of firms and taxes less subsidy.

The other approach which is most commonly used is expenses approach. In expenses approach, total personal consumptions, gross investments, government spending and net exports (i.e. total exports – total imports) are added up to find out Gross Domestic Product or GDP of a country.

Gross Domestic Product or GDP = Personal Consumption + Gross Investment + Government Spending + (Exports – Imports)

GDP Growth Rate

GDP growth rate is calculated in percentage by looking at the increase in Gross Domestic Product quarter on quarter or year on year. By doing this you can know whether the country’s economy is growing or slowing down.

GDP Per Capita

GDP per capita is used to compare a country’s economic output as relates to its standard of living. It’s calculated by dividing country’s Gross Domestic Product by its number of residents.

This measure cannot be taken into consideration while comparing two country’s economy as we use denominator “number of residents” in it.

If the country has high GDP then its unemployment ratio will go down as growth in economy requires business to employ labour into industries. Wages compare to last year’s is also another yardstick to see whether Gross Domestic Product is increasing or decreasing. If the country or economy is in recession then the GDP growth will be in negative.

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.