Methods for calculating GDP

Despite the fact that the GDP index seems to people far from the economy, something beyond understanding, in fact, the calculation of GDP is quite simple. Of course, we can not say that this indicator has no shortcomings, because it does not take into account many subjective factors of economic development, such as specialization of production, science intensity, etc. However, GDP, being an indicator calculated according to strict mathematical rules, can be calculated quite accurately, despite the huge scale of the national economy. Comparison of the development of different economies can also be done quite accurately. It is enough only to compare GDP per capita in dollar terms. Moreover, all methods of calculating GDP yield the same result, which is very convenient for using this indicator in analytical calculations.

In total, today there are three methods for determining GDP. The first method, classical, is a simple addition of the added values created in the economy for a certain period. It should be noted that the calculation of GDP does not take into account the cost of raw materials used in the production process. Otherwise we would consider their cost several times - for the first time as a finished product, for the second time as an integral part of the value of the course product. Thus, GDP can be calculated by adding the economic result of each economic entity's work. That is, the calculation takes into account only the value that the company added, not the total cost of the product.

If this method seems a bit confusing to you, then perhaps you should pay attention to other methods of calculating GDP. The so-called expenditure method is today most often used by experts in the field of macroeconomics. According to this method, the entire country's GDP is divided into four main components: household expenditures, i.e. Ordinary consumers, company spending, namely investment, public spending and the relationship of the national economy with foreign countries.

In fact, a fairly simple scheme is obtained. Everything that is not spent by households is invested by enterprises, according to the macroeconomic law discovered by Keynes. We add here another state that collects taxes to the budget and for this account carries out state purchases, forming additional demand. In the open economy, additional demand is also formed abroad, if exports exceed imports, in the opposite situation, demand, and therefore GDP, on the contrary, decreases. Because of its simplicity and clarity, this equation is used not only to calculate GDP, but also in other more complex studies.

Finally, the methods of calculating GDP closes the income method. In this rather rarely used method there is a logic similar to the expenditure method. The entire GDP is divided between economic entities that provide production factors, only in this case are they considered not their expenditures but their incomes. Since the expenses are equal to the incomes, the result will be the same. Thus, in this case it is necessary to add up wages (income of individuals), profits (companies' incomes), interest (income for providing capital), and rent (income for providing land).

As you can see, the methods of calculating GDP and their logic do not represent anything complicated. GDP is all that the economy produced by the joint efforts of all economic actors. At the same time, GDP does not include revenues from speculative financial transactions, since they do not increase real production. In addition, the GDP does not include operations for the sale of second-hand items and the donation of tangible assets. All these operations are just indicators of the redistribution of previously recorded benefits. GDP claims to reflect the real development of the national economy and today is the most suitable for this indicator, albeit far from perfect.