Gross domestic product (GDP)

Almost all countries calculate a set of numbers known as the national income and product accounts. The national income and product accounts, or national accounts, keep track of the flows of money between different parts of the economy.

Gross domestic product (GDP) is the total market value of all officially recognized final goods and services produced within a country in a given period of time. "Final" does not mean intermediate goods & services are ignored.

Included in GDP:
• Not only goods but also services
• Only those with market value
• Even if not sold - anything produced is part of GDP

Excluded in GDP:
• Financial assets like stocks are excluded as it is not a goods or services. Brokerage on transaction, as it is a service, in financial assets is part of GDP though.
• Foreign produced goods & services - imported goods are not part of GDP.
• Used goods. E.g. resell of car is not part of GDP as the car is already part of GDP in the year of production. Any brokerage commission paid on buying used car is part of GDP

Value of production is defined as (quantity of production) x (price of the product). 

Profits = Sales – wages – raw materials/services costs
Thus Sales = profits + wages + raw materials/services costs
Value added is defined as Value of production - cost of raw materials purchased = Profits + wages

Methods of calculating GDP

1. Final use (or Flow of product) method: GDP is calculated by adding the value of production of all the final goods and services produced, i.e., the value of production of all the final consumption and investment goods and services. The intermediate goods & services are ignored and only final goods & services are considered.

2. Product (or Value-added) method:  GDP is calculated by adding the value added by all the producers. All the producers whether producing final or intermediate goods and services are considered in this method.

GDP is produced goods or services ready for consumption;
= C + I + G + X

where,
C = Consumption goods for households on goods and services
I = Investment goods for private (fixed) investments = expenditure on final investment goods (durable goods like plant, machinery, buildings) + Net change in inventories
G = Government expenditure on goods and services including on investment goods
X = Net export (i.e. export minus import) of goods and services


3. Income (or earnings) method: GDP is calculated by adding all the factor incomes accruing to the household sector.

GDP is an earnings of a country waiting get spend:
 = Profits + wages + other incomes + depreciation + net production taxes

Real and Nominal GDP

Economist are not really interested in the money value of the GDP but they are more interested in the quantity or value of production. However, as there are so many products, they can only be measured in term money as one common measure. And so, economist do the adjustment in GDP number to exclude the affect of change in the money value and to quantify the GDP change due the increase in quantity of production and this is termed as Real GDP.


Real GDP is the GDP at constant prices and is used to find out how aggregate production has changed in real terms. It is the total value of final goods and services produced in the economy during a year, calculated as if prices had stayed constant at the level of some given base year. In India, currently 2004-05is the base year.

Nominal GDP is the GDP at current prices and so the GDP number has not been adjusted for changes in prices is calculated using the prices in the year in which the output is produced.


Notes: 

Deflation or Inflation is the gap between Nominal GDP and Real GDP.

GDP at market price = GDP at factor cost + indirect taxes – subsidies.