GDP is one of the primary indicators used to measure the strength of a nation’s economy. It reflects the aggregate value of products and services (in dollars) manufactured within the given timeframe. It represents the size of the economy. Generally, GDP is presented to compare the economy of the current quarter or year with that of the previous quarter or year. For example, if the year-to-year GDP is up 6%, this means that the economy has grown by 6% over the previous years.
Calculating GDP is not an easy task. It is complicated and calls for expertise from the economists. The basic concept for calculating GDP can be understood in two ways −
● Summing up total money made or earned in a year. This is known as income approach.
● Summing up total money spent in a year. This is known as expenditure approach.
Practically, both measures should approximately give the same total. The income approach, also known as GDP(I). It is computed by summing up total compensation to employees, gross profits for integrated and non-integrated enterprises, and taxes less any subsidies. The expenditure method is the more common approach and is computed by summing up total consumption, investment, government spending and net exports.