What is Gross Domestic Product (GDP) Explain the different techniques of GDP measurement


Gross Domestic Product (GDP) is the name we give to the total market value of the final goods and services produced within a nation or country during a given period of time. GDP is the most comprehensive measure of a nation’s total output of goods and services. It is the sum of the dollar values of consumption (C) gross Investment (I) government purchase of goods and services (G) and net exports (X) produced within a nation or country during a given period of time say year. In symbols we can express as

GDP = C + I + G + X

GDP is used for many purposes but the most important one is to measure the overall performance of an economy.

Methods to Measure GDP

1.         Product Method of Measuring GDP: The product approach defines a nation’s Gross Domestic Product (GDP) as the market values of final goods and services newly produced within a nation during a fixed period of time.

2.         The Expenditure Method of Measuring GDP: A different perspective on the components of GDP is obtained by looking at the accounts expenditure side of the national income. The expenditure approach measures GDP as total spending on final good and services produced within a nation or country daring a specified period of time. Four major categories of spending are added to get GDP i.e. consumption, investment, purchase of goods and services and net exports of goods and services. In symbols we can express as

Y = C + I + G + NX
Y = GDP = Total Production (or output)
= Total Income
= Total Expenditure
C = Consumption
I = Investment
G = Government purchase of goods and services
NX = Net exports of goods and services

Above equation is the one of basic relationship in macroeconomics and this equation is called the income-expenditure identity because it states that income Y, equals total expenditure

C + I + G + NX

3.         The Income Method of Measuring GDP: The third and final way to measure GDP is the income approach. It calculates GDP by adding the income received by producers including profits and taxes paid to the government. A key part of the income approach is concept known as national income. National income is the sum of five types of income i.e. compensation of employees, proprietor’s income, rental income of persons, corporate profits and net interest.

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