GDP stands for Gross Domestic Product and is a measure of all goods and services produced by a nation in a year. GDP is often used in economics to compare the added value of the economic output of different countries. Economists calculate GDP using two main methods: an expenditure-based approach, which measures total expenditure, and an income-based approach, which measures total income. The CIA World Factbook website offers all the data needed to calculate the GDP of every country in the world.
Calculate GDP using the purchase methodCalculate GDP using the purchase method
- Start with consumer spending. Consumer spending is a measure of the total expenditure on goods and services in a country, borne by consumers throughout the year. Examples of consumer spending might include purchasing consumer goods such as food and clothing, durable goods such as tools and furniture, and services such as haircuts and doctor appointments;
- Add investments. When economists calculate GDP, investments do not mean the purchase of stocks or bonds, but the money spent by companies on the purchase of goods and services needed by the business:
- Examples of investments include raw materials and services used by a company to build a new factory, or purchases of equipment and software for efficient business management;
- Add exports net of imports. As GDP only calculates goods produced in the territory, imported goods must be subtracted. Exports, however, must be added because once products leave the country, they will not even be added to consumer spending. For the calculation of imports and exports, take the total value of exports and subtract the total value of imports. Then add this result to the equation:
- If a nation’s imports have a higher value than exports, this number is negative. If the number is negative, you will need to subtract it instead of adding it.
- Include public spending. The money the government spends on goods and services must be added to the GDP calculation:
- Examples of public spending include civil servant salaries, infrastructure and defense expenditures. Social security and unemployment benefits are considered transfers and are not included in public expenditure because the money is simply transferred from one person to another.