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How to Calculate GDP?


The Methods of Calculating GDP

Gross Domestic Product-GDP is the monetary value of all the finished goods and services produced within a country’s boarder in a specific time period. There are three alternative methods of computing GDP. This includes:

1.       Value Added Method

2.       Factor Income Method

3.       Expenditure Method



These methods are described below:

1. Value Added Method:

This is also known as inventory method. In this method the sum total of the gross value of the final goods and services in different sectors of economy such as industry, service, agriculture etc is acquired for the current year by determining the total production the was made during the specific time period. The value obtained in the gross domestic product.

GDP is calculated using value added method or output method by summing the value of sales of goods and adjusting or subtracting for the purchase of intermediate goods t produce the goods sold.

Thus, GDP (using value added Method) = Value of output – Cost of Intermediate Goods

Example:    In this method GDP only calculates the final goods. Suppose cattle rancher sells one-quarter pound of meat to a shop for $1. The shop produces a hamburger for $4,(total $5). Here the hamburger is included in GDP but the meat is not. Thus the meat which is intermediate good, will be eliminated from the output value, while calculating GDP.



2. Income/ Factor Income Method:

Under factor income method, GDP is measured as the total sum of the factor payments received during a certain time period. The factors of production include land, labor, capital and entrepreneurship. Individual who provides factor services get payment in the form of rent, wage, interest and profit. The total sum of this individual comprises the GDP for a given time period. However income received in the form of transfer payment are not included.

Thus, GDP (using Factor Income Method) = Rent + Wage + Interest + Profit +Dividends +Direct                                                                                            Taxes+ Depreciation            

                                                                                                                                   

3. Expenditure Method: Under this method, GDP is measured as the sum total of expenditures made by individuals on personal consumption, firms on private investment and government authorities on government purchases. With an exception of avoiding intermediate expenditure in order to evade the problem of double counting, GDP is calculated on market price.

GDP (using Expenditure Method) = Consumption + Investment + Government Expenditure + (Export-                                                                                                                                                                     import)


Therefore, from these three types of methods we get three type of GDP:

1. Value Added Method (GDP at factor cost)

2. Factor Income Method (GDP at factor price)

3. Expenditure Method (GDP at market price)


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