How GDP is Computed?

GDP or Gross Domestic Product is simply the total market or monetary value of all services like private schools debt collection, cleaning companies, contracting etc. and finished goods such as consumer electronics, automobile, textile and more that are produced within the country in a given period. GDP serves as a comprehensive tool for assessing the current economic health of a country.

Despite the fact that GDP is usually computed yearly, sometimes it is calculated every 3 months or per quarter. In United States for instance, the US government is releasing their annual GDP estimate for every fiscal quarter and also, for calendar year. The data presented in the report includes real-time information. In US, it is the Bureau of Economic Analysis or BEA that is tasked to compute the GDP. They do this by utilizing data ascertained via surveys of builders, retailers, manufacturers and also, by reading trade flows.

Biggest Contributor in GDP Calculation

Computing the GDP of a country is encompassing all public and private consumption, investments, government outlays, paid-in construction costs, addition to private inventories, foreign balance of trade and everything in between.

Out of all elements that compose the GDP of a country, foreign balance of trade is the most important. Country’s GDP has the tendency to increase when its overall value of services and goods that domestic producers sell in other countries have exceeded the total value of the foreign services and goods that its domestic consumers are buying.

When such thing happens, the country then have surplus in trade. Now, assuming that what happened is the opposite where the amount that the domestic consumers are spending on foreign products are larger than total sum of the domestic producers can sell to its foreign consumers, then this is referred to as trade deficit. In such cases, the GDP of the country is more likely to drop.

Variations in Calculating GDP

There are many other ways of computing the GDP and some of it are:

Nominal GPD – this is evaluated at the current price of the market either local or international. This is done using the currency market exchange rate to be able to compare the GDP of the country primarily in terms of financial terms.

Purchasing Power Parity – short for PPP and is measured in international dollars. With this method, it is used to adjust the differences both in costs of living and local prices to be able ot make cross-country comparisons of real income, living standards and real output.