How Is GDP Calculated?

Written by alan kirk
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Gross domestic product (GDP) is a way that the economic outputs of different countries are compared. The gross domestic product accounts fopr services as well as for product. Gross domestic product does not indicate how much the average individual is making; instead, it is an aggregate picture of economic activity within a country is producing. Countries with higher GDPs are considered to be more financially stable and productive than those with lower ones.

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The Components Of GDP

Several different categories are added together to calculate the GDP of a country. One category is net exports, which is the amount of products the country sells outside its borders compared with the amount of products it purchases from outside its borders. This is added to the value of products that are produced by the country and purchased within its own borders, this is described by the term consumption. Consumption and net exports are combined with the amount of money businesses invest in growing their own business within the country; this is referred to as investment. The final component added to the other three to calculate a country's GDP is government outlays. This is money that the government spends on products. It is actually a net calculation because financial assistance the government provides to citizens such as welfare is deducted when determining GDP.

What Does GDP Really Show?

The GDP of a country reveals how much production is going on in the country and the money being made off of that production. Unfortunately it's not 100 per cent accurate, as some transactions take place in "under the table"--they are not reported to the government through tax payments. These are not included in the GDP calculation.

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