GDP, also known as gross domestic product, is the total market value or monetary value of all the finished goods and services produced within the borders of a country during a specific time period.

The total goods and services comprise all the government spending, net exports, investments, and private expenditures.

The three approaches to determine GDP are as follows:

1. Expenditure approach
2. Income approach
3. Output approach

Let us discuss these in brief in the following lines:

Expenditure approach

The expenditure approach calculates the GDP by calculating the sum of all the services and goods produced in an economy.

The GDP formula is mathematically represented as:

Y = C + I + G + (X − M)

Where,

Y = Gross domestic product

C = Consumption

I = Investment

G = Government spending

X = Exports

M = Imports

The components are described in brief here.

1. Consumption is denoted by C. It stands for all the private spending, which includes services, non-durable and durable goods.
2. Government expenditure is denoted by G and includes employee salaries, construction of roads and railways, airports, schools, and expenditures in the military.
3. Investment is denoted by I and refers to all the investments that are spent on housing and equipment.
4. Net export is denoted by (X – M), which is the difference between the total imports and exports.

Income approach

The income approach of GDP calculation is based on the total output of a nation with the total factor of income received by the residents or citizens of a nation.

The formula for calculating GDP by the income approach is:

GDP = Compensation of employees + Rental and royalty income + Business cash flow + Net interest

Output approach

The output approach emphasises the total output of a nation by finding the value of the total value of goods and services produced in a country.

The formula for calculating GDP by the output approach is:

GDP = GDPmp of primary sector + GDPmp of secondary sector + GDPmp of tertiary sector

GDPmp (for all the sectors is calculated as) = Sales + Change in stock – Intermediate consumption

Also Read:

•     Nominal and Real GDP
•     GDP and Welfare
•     Difference Between GDP and GNP

This was all about the GDP formula, which is a very important concept for determining the total output of a nation in terms of monetary value. For more such interesting concepts, stay tuned to our website.