Thursday, December 8, 2022

What is GDP and how is it calculated?

(GDP) is the all about money related or market worth of the multitude of completed labour and products delivered inside a nation’s lines in a particular time span. As an expansive proportion of generally speaking home grown creation, it capacities as a far reaching scorecard of a given country’s monetary wellbeing.

However GDP is commonly determined on a yearly premise, it is once in a while determined on a quarterly premise too. In the U.S., for instance, the public authority delivers an annualized GDP gauge for each monetary quarter and furthermore for the schedule year. The individual informational indexes remembered for this report are given in genuine terms, so the information is adapted to value changes and is, along these lines, net of expansion. In the U.S., the Bureau of Economic Analysis (BEA) figures the GDP utilizing information discovered through reviews of retailers, makers, and manufacturers, and by taking a gander at exchange flows. The computation of a country’s GDP includes all private and public utilization, government expenses, speculations, increments to private inventories, paid-in development costs, and the unfamiliar equilibrium of exchange. (Fares are added to the worth and imports are subtracted).Of every one of the parts that make up a nation’s GDP, the unfamiliar equilibrium of exchange is particularly significant. The GDP of a nation will in general increment when the absolute worth of labour and products that home grown makers offer to outside nations surpasses the all out worth of unfamiliar labour and products that home grown customers purchase. At the point when the present circumstance happens, a nation is said to have an exchange excess. On the off chance that the contrary circumstance happens—if the sum that home grown buyers spend on unfamiliar items is more noteworthy than the complete amount of what home grown makers can offer to unfamiliar customers—it is known as an import/export imbalance. In the present circumstance, the GDP of a nation will in general diminish.

Gross domestic product can be processed on an ostensible premise or a genuine premise, the last representing swelling. In general, genuine GDP is a superior technique for communicating long haul public financial execution since it utilizes consistent dollars. For instance, assume there is a country that in the year 2009 had an ostensible GDP of $100 billion. By 2019, this current country’s ostensible GDP had developed to $150 billion. Throughout a similar timeframe, costs likewise rose by 100%. In this model, if you somehow happened to take a gander at the ostensible GDP, the economy has all the earmarks of being performing great. In any case, the genuine GDP (communicated in 2009 dollars) would just be $75 billion, uncovering that, in fact, a general decrease in genuine monetary execution happened during this time.

What is GNP and how is it calculated?

Gross National Product (GNP) is a measure of the value of all goods and services produced by a country’s residents and businesses. It estimates the value of the final products and services manufactured by a country’s residents, regardless of the production location.

The official formula for calculating GNP is as follows:

Y = C + I + G + X + Z


C – Consumption Expenditure

I – Investment

G – Government Expenditure

X – Net Exports (Value of imports minus value of exports)

Z – Net Income (Net income inflow from abroad minus net income outflow to foreign countries)

Alternatively, the Gross National Product can also be calculated as follows:

GNP = GDP + Net Income Inflow from Overseas – Net Income Outflow to Foreign Countries


GDP = Consumption + Investment + Government Expenditure + Exports – Imports

Gross National Product takes into account the manufacturing of tangible goods such as vehicles, agricultural products, machinery, etc., as well as the provision of services like healthcare, business, consultancy, and education. GNP also includes taxes and depreciation. The cost of services used in producing goods is not computed independently since it is included in the cost of finished products.

For year to year comparisons, Gross National Product needs to be adjusted for inflation to produce real GNP. Also, for country to country comparisons, GNP is stated on a per capita basis. In computing GNP, there are complications on how to account for dual citizenship. If a producer or manufacturer holds citizenship in two countries, both countries will take into account his productive output, and this will result in double counting.

The value of goods and services produced within the geographical boundaries of a nation in a financial year is termed as GDP.The value of goods and services produced by the citizens of a nation irrespective of the geographical limits in a financial year is known as GNP.
What Does It Measure?
It measures only the domestic production.It measures only the national production.
It emphasises on the production that is obtained domestically.It emphasises on the production that is achieved by the citizens living in different nations.
It highlights the strength of the country’s economy.It highlights the contribution of the residents to the development of the economy
Scale of Operations
Local scaleInternational scale
The goods and services that are being produced outside the economy are excluded.The goods and services that are produced by the foreigners living in the country are excluded.
CA Divya Thakkar
Chartered accountant | IIM Bangalore 7+years of experience in Consultancy, Investment Banking, Ecommerce & IT Industry. Expert in IFRS, USGAAP, INDAS & US Regulatory requirement. Currently working with Deloitte Touche & Company in Risk ,Finance & Control advisory. Worked in Companies like Barclays Bank, HCL Technologies Ltd & BazaarCart.

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