Gross Domestic Product

Gross domestic products (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period.

It is an aggregate measure of production equal to the sum of the gross values added of all resident and institutional units engaged in production and services plus any taxes, and minus any subsidies on products not included in the value of their outputs

Determining GDP

Three ways

1. Production (output or value added) approach

2. Income approach

3. Speculated expenditure approach

The most direct of the three is the production approach,

sums outputs of every class of enterprise to arrive at the total.

The expenditure approach works on principle that all of the product must be bought by somebody, therefor the value of total product must be equal to people's total expenditure in buying things

The income approach works on the principle that incomes of productive factors must be equal to the value of their product, and determines GDP by finding the sum of all producers incomes

Production approach,

1. Estimate the gross value of domestic output of many various economic activities

2. Determine intermediate consumption i.e. cost of material, supplies and services used to produce final goods or services

3. Deduct intermediate consumption from gross value to obtain the gross value added

gross value added  = gross value of ouput- value of intermediate consumption

value of output = value of total sales of goods and services plus value of changes in the inventory

The sum of gross value added in various economic activities is known as "GDP at factor cost"

GDP at factor cost plus indirect taxes less subsidies on products = GDP at producer price

for measuring output of domestic product, economic activities (industries) are classified into various sectors.After classifying economic activities, the output of each sector is calculated by any of the following two methods:

1. By multiplying the output of each sector by their respective market price and adding them together

2. By collecting data on gross sales and inventories from the records of companies and adding them together

The value of output of all sectors is then added to get the gross value of output at factor cost. Subtracting each sector's intermediate consumption from gross output value gives the GVA (=GDP) at factor cost. Adding indirect tax minus subsidies to GVA (GDP) at factor cost gives the "GVA (GDP) at producer prices".

Expenditure approach

Another way to estimate GDP is to calculate the sum of final uses of goods and services measured in purchasers prices

market goods which are produced are purchased by someone. in the case where a good is produced and unsold, the standard accounting convention is that the producer has bought the good from themselves. Therefore, measuring total expenditure used to buy things is a way of measuring production. this is known as expentiure method of calculating GDP

Components of GDP by expenditure
GDP (Y) is the sum of consumption, investment, government spending and net exports (X-M)

Y  = C + I + G + (X-M)

C (consumption) is normally the largest GDP component in the economy, consisting of private expenditures in the economy (household final consumption expenditure). These personal expenditures fall under one of the following categories: durable goods, nondurable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses, but not the purchase of new housing.

I (investment) includes, for instance, business investment in equipment, but does not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in investment. In contrast to its colloquial meaning, "investment" in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products.

G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchases of weapons for the military and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits.

X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.
M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.