How to Calculate GDP
Start with consumer spending., Add in investment., Insert the excess of exports over imports., Include government spending.
Step-by-Step Guide
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Step 1: Start with consumer spending.
Consumer spending is the measure of all spending a nation's consumers make on good and services during the year.
Examples of consumer spending would include the purchase of consumable goods like food and clothing, durable goods like tools and furniture, and services such as hair cuts and doctor visits. , When economists calculate GDP, investment does not mean the purchase of stocks and bonds, but rather money spent by businesses to acquire goods and services to help or maintain the business.
Examples of investments include materials or contracting services used when a business builds a new factory, equipment purchases and software to help a business run efficiently. , Because GDP only calculates products produced domestically, imports must be subtracted out.
Exports must be added in because once they leave the country, they will not be added in through consumer spending.
To account for imports and exports, take the total value of exports and subtract the total value of imports.
Then, add this result into the equation.
If a nation's imports have a higher value than its exports, this number will be negative.
If the number is negative, subtract it instead of adding it. , The money a government spends on goods and services must be added to calculate GDP.
Examples of government spending include payroll for public employees, spending on infrastructure and defense spending.
Social security and unemployment benefits are considered transfer payments and are not included in government spending because the money is simply transferred from one person to another. -
Step 2: Add in investment.
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Step 3: Insert the excess of exports over imports.
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Step 4: Include government spending.
Detailed Guide
Consumer spending is the measure of all spending a nation's consumers make on good and services during the year.
Examples of consumer spending would include the purchase of consumable goods like food and clothing, durable goods like tools and furniture, and services such as hair cuts and doctor visits. , When economists calculate GDP, investment does not mean the purchase of stocks and bonds, but rather money spent by businesses to acquire goods and services to help or maintain the business.
Examples of investments include materials or contracting services used when a business builds a new factory, equipment purchases and software to help a business run efficiently. , Because GDP only calculates products produced domestically, imports must be subtracted out.
Exports must be added in because once they leave the country, they will not be added in through consumer spending.
To account for imports and exports, take the total value of exports and subtract the total value of imports.
Then, add this result into the equation.
If a nation's imports have a higher value than its exports, this number will be negative.
If the number is negative, subtract it instead of adding it. , The money a government spends on goods and services must be added to calculate GDP.
Examples of government spending include payroll for public employees, spending on infrastructure and defense spending.
Social security and unemployment benefits are considered transfer payments and are not included in government spending because the money is simply transferred from one person to another.
About the Author
Margaret Hughes
Dedicated to helping readers learn new skills in cooking and beyond.
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