What is GDP? How is GDP calculated?

GDP is an important indicator in the overall assessment of an economy at a given time. This indicator is widely used when it comes to finance, but still many people do not understand what GDP is? Meaning and how to calculate GDP?

Overview of GDP

Every year, GDP is the most concerned economic indicator. This index is given to assess the overall growth rate of the economy as well as the development level of a region or a country.

What is GDP?

GDP stands for the English phrase Gross Domestic Product, which means gross domestic product or gross domestic product. This is an indicator used to measure the total market value of all final goods and services produced within a national territory in a given period (usually 1 year or 1 quarter)

what-is-gdp

To understand GDP you must have a clear understanding of the following:

– GDP is the indicator measuring the total market value: That is, GDP will add many kinds of products into a single indicator of the value of economic activity by using market prices. Because the market price represents the amount consumers are willing to pay for different goods, it accurately reflects the value of these goods.

– GDP fully represents all goods produced in the economy and legally sold in markets. However, GDP does not count products manufactured and sold in the underground economy like illegal drugs. The vegetables and fruits in the stores are part of GDP, but if you consume vegetables in your home garden, they are not part of GDP.

– Goods and services included in GDP include tangible goods (food, cars, clothing …) and intangible services (haircut, medical examination, house cleaning …).

– GDP includes only the value of final goods and services, excluding the value of intermediate goods.

– GDP includes all goods and services produced in the present period, excluding goods produced in the past.

– GDP calculated by economic territory. The economic territory of a country is conceived to include units of production and business in the form of a permanent organization, individual or household.

– GDP reflects the value of production realized over a specific period of time, usually a year or a quarter.

What is GDP per capita?

GDP per capita (GDP per capita) is an economic statistical indicator that shows the results of production per capita of a country in a year. The GDP per capita of a country at a given time would be calculated by dividing the GDP of the country at that time by the total population of the country at that time.

gdp-per-capita

High GDP per capita is proportional to the income and well-being of the people in that country. However, some countries with high GDP are not necessarily the country with the highest standard of living.

Factors affecting GDP

GDP is influenced by many different factors within the territory of that country. However, there are 3 factors that have a certain effect on GDP. Specifically:

Population

Population is a source of labor for society to create material and spiritual wealth, but at the same time is the consumer of products and services created by people. Therefore, population and GDP have an interrelated and inseparable relationship. Population is the key factor that makes it easy to calculate a country’s GDP per capita at a given time.

FDI

FDI (English is Foreign Direct Investment) is the index of foreign direct investment, a form of long-term investment of an individual or organization in another country by setting up factories and business establishments. . This is an important factor in the manufacturing process because FDI will include money, materials, means of production, infrastructure and related social activities. Thus, FDI will have influences on the calculation of the GDP index.

Inflationary

Inflation is the continual increase in the overall price of goods and services over time and the devaluation of a currency. This is a very interesting indicator in the economic sector. Economic process of a country that wants to grow at a high level must accept inflation with a certain level. However, when inflation is too high, it will cause misconception for GDP growth and lead to economic crisis. There are many reasons for inflation and the State must always have policies to control inflation.

The significance of the GDP index

For a country, the GDP index is of great significance. Whereby:

  • GDP is a measure to evaluate the economic growth of a country and show the fluctuation of products / services over time.
  • The decline of the GDP index will have a negative impact on the economy and can lead to economic recession, inflation, unemployment, and the devaluation of the currency … These are negative impacts, direct effects business processes of enterprises as well as people’s lives.
  • The GDP per capita will tell you the relative income as well as the quality of life of the people in each country.

However, the GDP index also has certain limitations:

  • GDP does not fully reflect production activities such as self-sufficiency, self-sufficiency, and lack of quality control of goods.
  • GDP does not take into account or quantify the value of informal economic activities such as paperwork, black market operations, volunteer work, and household production.
  • GDP does not take into account profits earned in a country because foreign corporate profits are sent back to foreign investors.
  • GDP only considers the production of final goods and new capital investment, ignoring the activities between enterprises and enterprises through spending activities, intermediate transactions between enterprises.
  • GDP growth cannot accurately measure the development of a country or the lives of its people because GDP only emphasizes physical output without considering the overall development of a country.

How to calculate GDP

GDP is calculated by many different methods, each method will have a separate formula.

Calculate GDP by expenditure method (calculate total expenditure)

This is considered one of the most accurate methods of calculating GDP. Accordingly, the GDP of a country will be calculated by taking the sum of all the money that households in that country spend to buy and use services. The formula is as follows:

GDP = C + G + I + NX

Inside:

  • C (Household Expenditures): Includes all expenditures on household products and services.
  • G (Government expenditure): The total expenditure on education, health, security, transportation, services, policy …
  • I (Total investment): is the consumption of investors, including the enterprise’s expenses on equipment, factories …
  • NX (trade balance): Is the “net export” of the economy. NX = X (export [export]) – M (import [import]).

Nominal-GDP-Formula

Example: A simple economy consists of: households (H), mill owners (M), and baker owners (B). H buys bread from B for 100 and flour from M for 10 (as expenditures on the end product). B buys flour from M for 40 to make bread. Assume that M uses no other intermediates. Both B and M receive labor service and capital from H; B has paid H the amounts including: 30 for labor costs and 30 for capital services. Similarly, M has paid H the amounts including: 40 for labor and 10 capital rental. From the above information, GDP by the expenditure method will be calculated as follows:

GDP = C + G + I + NX (since there is only household expenditure so I = 0, G = 0, NX = 0) => GDP = 10 + 100 = 110

See also: What is inflation? Inflation rate 2019 Philippines

GDP calculation by cost method (by income)

Under this method, GDP will be calculated by calculating the sum of wages, interest, profits and rent generated in the domestic economy. The formula is as follows:

GDP = W + I + Pr + R + Ti + De

Inside:

  • W (Wage): salary
  • I (Interest): interest
  • Pr (Profit): profit
  • R (Rent): rent
  • Ti (Indirect tax): indirect tax (a tax not directly imposed on taxpayers’ income and assets, but indirectly through the prices of goods and services)
  • De (Depreciation): the depreciation (amortization) of a fixed asset

Example: A simple economy consists of households (K), mill owners (A), and baker owners (B). K buys bread from B for 200 and flour from A for 20 (as expenditures on the end product). B buys flour from A for 50 to make bread. Suppose A does not use any other intermediate products. Both B and A receive labor services and capital from K; B has paid for K amounts including: 40 for labor hiring costs and 40 for capital services. And A has paid for K the amounts including: 50 for the cost of labor and 20 for renting capital.

Apply a formula for calculating GDP by the cost method (in terms of income), instead of looking at who buys the product, you can find out who will be paid to produce it. As follows:

Name Labor costs Capital Services Household (K) received
B 40 40 80
A 50 20 70
The total amount of K received for production 150

Thus: GDP = (40 + 50) + (40 + 20) = 150

Calculate GDP by production method

In terms of production, gross domestic product (GDP) is the sum of all added values ​​of a country’s economy in a given period of time. Therefore, this method is also known as the value-added method. Formula for calculation:

GDP = Value added + Import tax

or

GDP = Production value – intermediate costs + import taxes

In which, the added value of each economic sector can be: producer income, wages, insurance, production tax, depreciation of fixed assets, surplus value, other income …

Example: A simple economy consists of households (C), baker owners (B), and mill owners (A). C buys bread from B for 100 and flour from A for 10 (as expenditures on the end product). B buys flour from A for 40 to make bread. Suppose A does not use any other intermediate products. Both B and A receive labor services and capital from C; B has paid C for the amounts including: 30 for labor costs and 30 for capital services. And A has paid C for the amounts, including: 40 for the cost of labor and 10 for leasing capital.

In fact, not all market transactions are fully valued in GDP. Because if you do, the same product will be counted multiple times. Therefore, to have an accurate GDP, you must distinguish intermediate goods from goods that are purchased for use as inputs to produce another product and are used only once in the production process. Now we have:

– B buys flour from A for 40 and sells to C for 100, at which point B has 60

– C is paid 40 by A for the cost of labor hiring and 10 for leasing capital, thus C has 50.

=> GDP = added value + tax loss = (10 + 40) + (100 – 40) = 110

Distinguish GDP and GNP

GDP and GNP are two indicators of interest in the economic sector. Talking about GDP and GNP is talking about the economic development of a country. Many people confuse these two indicators when looking at a country’s economy. The following table will help you to distinguish the similarities and differences between GDP and GNP:

Criteria GDP indicator GNP Index
Same – All are indexes used in the field of macroeconomics to evaluate the economic development of a country.

– Both GDP and GNP are the final numbers of a country / year.

– Defined by specific formula

Different
Concepts GDP is gross domestic product or gross domestic product. Accordingly, GDP indicates the total value of all goods, products, services … of a country achieved within 1 year. The higher the GDP, the stronger the economy is and vice versa. GNP (Gross National Product in English) means total national output or gross national product. GNP is the sum of the monetary value of the final products and services created by all citizens of a country in one year. GNP assesses the economic development of a country.
Calculation formula The formula for calculating GDP is total consumption:

GDP = C + I + G + NX

The formula for calculating GNP is the gross national product: GNP = C + I + G + (X – M) + NR
Nature – GDP is the index of gross domestic product (domestic).

– The GDP index is the total value created by economic sectors operating in the territory of that country over a period of 1 year.

– The economic sectors contributing to the GDP index include domestic and foreign economic sectors operating in that country.

– GDP is an index used to evaluate the strength of a country’s economy.

– GNP is the index reflecting the gross national product (domestic and foreign)

– GNP index is the total value produced by nationals of that country over a period of 1 year. Citizens of that country can create value both inside and outside of that country.

Note:

  • C = Personal consumption expenses
  • I = Total personal investment
  • G = Cost of the state
  • NX = “net exports” of the economy
  • X = Export value of goods and services
  • M = Import value of goods and services
  • NR = Net income from overseas investment goods and services (net income)

Example: An American investor invests in a fast food factory located in Philippines for domestic consumption. Now:

Any factory income after sales is included in Philippines’s GDP

gnp-vs-gdp

Net profits earned (after tax deductions and deductions from welfare funds) and the wages of American factory workers are counted as part of the US GNP.

Answer some questions related to GDP

What is nominal GDP?

Nominal Gross Domestic Product (English is the gross domestic product) GDP is calculated at current market prices. Nominal GDP includes price changes due to inflation, which reflect the rate of growth in an economy.

All goods and services included in nominal GDP are priced at the market prices sold in that calculation year. Since nominal GDP is calculated at current prices, nominal GDP growth year after year may reflect an increase in the price level, but it is in contrast to growth in goods and services. is produced.

If all prices go up or down together (ie, inflation), the nominal GDP becomes larger.

In macroeconomics, economists use the price of a commodity in one base year as a reference point when comparing GDP from year to year. The difference in price from the base year to the current year is called the GDP deflator.

What is real GDP?

Real GDP or real GDP (Real Gross Domestic Product or Real GDP in English) is a measure of the gross domestic product (domestic) adjusted for inflation.

Put simply, real GDP reflects the value of all goods and services produced by an economy in a given year, adjusted for inflationary effects. If inflation is positive, real GDP will be lower than nominal GDP and vice versa. If real GDP is not adjusted for inflation, positive inflation significantly increases nominal GDP.

Unlike nominal GDP, real GDP takes into account price changes and is a more accurate measure of economic growth. Usually it is easy to see if real GDP is used by economists to divide the macroeconomy and central bank planning.

Real GDP is usually provided by the General Statistics Office of Philippines. Real GDP calculation is done by dividing nominal GDP by the GDP deflator:

Real GDP = nominal GDP / GDP deflator

Example: If the price of an economy has grown by 1% since the base year, the deflator is: 1 + 1% = 1.01

If nominal GDP is $ 1,000,000, real GDP is calculated as:

Real GDP = $ 1,000,000 / 1.01 = $ 990,099

When nominal GDP is higher than real GDP, inflation is happening and when real GDP is higher than nominal GDP deflation is happening in the economy.

Philippines GDP 2020

GDP in Philippines is expected to reach 360.00 USD Billion by the end of 2020, according to Trading Economics global macro models and analysts expectations. In the long-term, the Philippines GDP is projected to trend around 373.00 USD Billion in 2021 and 379.00 USD Billion in 2022, according to our econometric models.

philippines-gdp-2020

See also: World Bank – Philippines GDP growth

Compare GDP and CPI

When comparing GDP and CPI, you are actually comparing the CPI and the GDP deflator, or GDP deflator, denoted by D GDP. These two indicators have the following similarities and differences:

Comparison criteria GDP Deflator (GDP Deflator) Consumer Price Index
Same Two main indicators to measure macroeconomics.
Different
Nature Measures all prices of goods and services produced. Measure the price of goods and services purchased by consumers (excluding prices of goods and services purchased by governments, firms)
Calculated value Charged only for domestically produced goods and services Charges for all goods and services purchased, including imported goods
Variability Variable. That is, this index allows for a change in the basket of goods as the GDP components change. This is called a Paasche index Fixed sway. That is, it is calculated by the fixed cart. This is called the Laspeyres index
Meaning Reduce the trend of increasing cost of life Cost of living measurement.

Top 10 economies in the world in 2019 – 2020 by GDP

In the fiscal year 2019 – 2020, although the economy has some certain changes, the GDP growth rate in some countries is still under control. Here are the top 10 economies in the world in 2019 – 2020 by GDP:

Country Nominal GDP GDP (PPP) – purchasing power parity
US 21.3 trillion USD 21 trillion USD
China 14.2 trillion USD 27.3 trillion USD
Japan 5.18 trillion USD 5.75 trillion USD
Germany $ 4 trillion 4.356 trillion USD
India 2.972 trillion USD 11.468 trillion USD
English 2,829 trillion USD 3.128 trillion
France 2.761 trillion USD 3.054 trillion USD
Italy 1.847 trillion USD 3,456 Trillion USD
Brazil 1.847 trillion USD 3,456 trillion
Canada 1.82 Trillion Dollars USD 1.93 trillion USD

(Note: Aggregate data according to the International Monetary Fund (IMF) source: wikipedia)

It can be seen that GDP is one of the important indicators in assessing a country’s economy. This is a term widely used in macroeconomics, helping readers understand and easily analyze the changes of the economy.

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