GDP stands for Gross Domestic Product and is a measure of the national production of goods and services in a year. GDP is usually used in the economy to compare the economic results of each country. Economists calculate GDP by two methods: the expenditure approach, which measures total expenditure, and the income approach, which measures total income. The CIA World Factbook website provides all the data needed to calculate the GDP of every country around the world.
Step
Method 1 of 3: Calculating GDP with the Expenditure Approach
Step 1. Start with consumer spending
Consumer spending is the calculation of all consumer spending of a country on goods and services in a year.
Examples of consumer spending are purchases of consumer goods such as clothing and food, durable goods such as appliances and furniture, and services such as haircuts and doctor visits
Step 2. Add investment
When economists calculate GDP, investment does not include the purchase of stocks and bonds, but the money that business owners spend to obtain goods and services for the sake of business continuity.
Examples of investments include materials and contractor services when a business owner builds a new factory, purchases of equipment and software to help with the efficiency of business operations
Step 3. Calculate the difference between exports and imports
Since GDP only takes into account domestically produced products, imports should be excluded from the calculation. Exports must be counted once the product leaves the country, exports will not be counted if purchased through consumer spending. To calculate exports and imports, subtract the total value of exports by the total value of imports, then add the resulting difference to the GDP calculation.
If the value of national imports is higher than exports, the result will be negative. If so, subtract the GDP calculation by that number instead of adding it
Step 4. Include state expenditures
The money the state spends on goods and services should be added to the GDP calculation.
Examples of state expenditures include civil servant salaries, spending on infrastructure and national defense. Social security and benefits for the community are considered as transfer payments and are not included in state expenditures because the money is only transferable
Method 2 of 3: Calculating GDP with the Income Approach
Step 1. Start with an employee welfare program
This is a combination of salaries, wages, benefits, pensions, and social security contributions.
Step 2. Add rental income
Rent is the amount of income earned from property ownership.
Step 3. Include flowers
All interest (money earned on equity participation) must be added.
Step 4. Add the income of the business actor
The income of business actors is money generated by business owners, including businesses that are legal entities, joint ventures, and individual companies.
Step 5. Add corporate profits
This is the income earned from shareholders.
Step 6. Include indirect business taxes
This includes all sales taxes, property taxes, and licensing fees.
Step 7. Calculate and add all depreciation
Depreciation is a decrease in the value of an item.
Step 8. Add net income from foreign parties
To calculate it, subtract the total payments received by Indonesian citizens from foreign parties with the total payments to foreign parties used for local production.
Method 3 of 3: Distinguishing Nominal GDP and Real GDP
Step 1. Distinguish nominal and real GDP to get a clearer picture of a country's economy
The main difference between nominal and real GDP is that real GDP takes inflation into account. If you don't take inflation into account, you can think that there is an increase in GDP, when in fact there is only an increase in prices.
Imagine, if the GDP of a country A was $1 billion in 2012, but in 2013 printed and circulated $500 million of money, the GDP would “certainly” increase compared to 2012. However, this increase does not reflect the production of goods and services in a country. Real GDP effectively offsets the effect of rising inflation
Step 2. Select the reference year
The reference year could be a year ago, 5 years ago, even 100 years ago. However you must choose a year to compare inflation. Because basically, real GDP is a comparison. New comparisons can occur when two or more things-years and numbers-are compared with each other. To calculate simple real GDP, select the year before the year you want to calculate as a reference.
Step 3. Calculate the price increase since the base year
This number is also known as the deflator. For example, if the inflation rate from the base year to the current year was 25%, you would get an inflation rate of 125, or 1 (100%) plus 0.25 (25%) times 100. In all cases of inflation, the deflator will always be greater than 1.
For example, if a country whose GDP you are calculating is experiencing deflation, i.e. purchasing power is increasing instead of decreasing, the deflator will be less than 1. For example, the rate of deflation during the reference year to the current year is 25%. This means that the country's currency can buy 25% more than the same value in the reference year. The deflator you get is 75%, or 1 (100%) minus 0.25 (25%) times 100
Step 4. Divide nominal GDP by the deflator
Real GDP is equal to the ratio of nominal GDP divided by 100. The formula is: nominal GDP real GDP = Deflator 100.
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So, if the current nominal GDP is $10 million and the deflator is 125 (25% inflation from the base year to the current year), here's how to build the equation:
- $10,000,000 real GDP = 125 100
- $10,000,000 real GDP = 1.25
- $10,000,000 = 1.25 X real GDP
- $10,000,000 1.25 = real GDP
- $8,000,000 = real GDP
Suggestion
- The third way to calculate GDP is by the value added approach. This method calculates the total value added to goods and services at each stage of production. For example, add value to rubber when it is processed into tires. Then also take into account the added value for all parts of the car when combined into a car. This method is rarely used because it performs double calculations and can inflate the true market value of GDP.
- GDP per capita is a measure of the average domestic production of people in a country. GDP per capita can be used to compare a country's productivity with its population. To calculate GDP per capita, divide the national GDP by the country's population.
