How do economists calculate GDP?

Fsp Invest, 14 Jan. 2014

Tags: gdp, calculating gdp, how do economists calculate gdp, how to calculate gdp, gross domestic product

Gross Domestic Product (GDP) is the total value of all goods and services produced in a country in a particular period, usually one year. Real GDP reflects the total economic activity after adjusting for inflation, and thus is one of the most important economic indicators out there. It’s important to keep an eye on GDP to know how healthy the economy is, and thus, what kind of returns you can expect on your investments. Let’s take a closer look at how economists calculate GDP.

There are three ways economists go about calculating GDP:
1. The Production or Output Method: Using this method to calculate GDP, economists sum up the total value added by all businesses. This is the value of production minus the input costs. Economists calculate this for all types of business across the various sectors, including agriculture, mining, manufacturing and services and arrive at a value for GDP. 
2. The Expenditure Method: In this method, economists add together all the spending in the economy. This includes private consumption such as food and clothing… As well as government spending like payment of government employees and investment in factories. 
3. The Income Method: This method of calculating GDP aggregates the total income from production and includes employees’ wages and salaries, income from self-employment, business profits from trading and other sources. 

In theory, each approach should yield the same value for GDP. 
So, this is how economists go about calculating the all-important GDP value for the country—the economic indicator which tells you how healthy the economy is and the returns the market will give you. 

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