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GDP by income and expenditure flow

Gross domestic product (GDP) - the sum of the costs of all goods and services produced in the state. Indicated in US dollars. Determined at the end of the fiscal year. Calculating the GDP annually, you can track the development of the economy. A change in the indicator may indicate how successful the economic policy was in the state. Knowledge of how to calculate GDP will help to understand the course of many macroeconomic processes.

GDP is found in one of three ways.

End-use method or calculation of gross domestic product by costs

Calculating the GDP indicator in this way, you need to add up the costs of all participants in the economic process, namely:

  • Consumer expenses of citizens (All expenses that households make, as well as the state for the maintenance of budget organizations, expenses of nonprofit firms for the purchase of personal and shared products, if organizations serve households, while expenses are long-term, for example, buying a car, and short-term - the purchase of products, separately allocated expenses for the purchase of services, including on credit),
  • The totality of investments in the economy (Investments are funds invested by an organization or private person, for example, in the purchase of equipment, as well as the purchase of real estate or software for the functioning of the company. An asset exchange is not considered an investment, and the acquisition of money is a savings. Also, the purchase itself securities is not considered an investment if, subsequently, the company does not use this revenue to modernize production, etc.)
  • Public expenditures (Funds spent by the state on the purchase of final goods. This includes the payment of salaries to state employees and the purchase of weapons, as well as government investments.)
  • Net export (is the difference between the total value of imported and exported products)

We get the GDP expenditure calculation formula, which determines the GDP using the end-use method:

GDP = C + I + G + Xn

In the formula for expenditures: C - consumer spending, I - investment, G - state. costs and X - an indicator of net exports (of the total value of exported we subtract the amount of imported).

Production method or finding the sum of all added values

To calculate the GDP indicator in this way, you need to add up all the added value of goods manufactured in the country. Value added is one that does not contain market prices for products purchased to manufacture the final product or service, therefore, it is the value that arose during production. Otherwise, when calculating GDP, some goods / services will be counted twice, and the result will be significantly distorted upward.

The advantage of this method is that it allows you to evaluate the role of a particular production, organization in the structure of state GDP. To find the DS (value added), you need to subtract the amount spent on products needed in production from the profit received during the implementation.

We get the following formula for calculating GDP:

GDP = DS + NPI - C, where: DS is the value added, NPI is the tax on production and import, and C is the subsidy on imports and manufacturing.

Income GDP or distribution method

To find the level of Gross Domestic Product (GDP) by this method, you should add all sorts of factor incomes and add depreciation and indirect taxes. The last two components are called non-profitable.

The GDP formula for income will include:

  • salaries of employees of the organization (this also includes additional and social payments, for example, bonuses and pensions)
  • gross mixed income and gross profit (funds left by the manufacturer, paid for the labor of employees and paid taxes to the treasury)
  • taxes on imports and production (mandatory payments to the state as stipulated by law. This includes duties, land tax, VAT, license tax, etc.)
  • rent
  • depreciation
  • interest on bank deposits

GDP does not include transfer payments (in exchange for which nothing was done). These include unemployment benefits and other social benefits. state payments, for example, pensions, as well as the purchase of used goods, financial transactions between individuals.

We get the following formula for calculating GDP:

GDP = ZP + P + Pr + VD + KS + A - PFD (from abroad)

in which: RFP is the money spent on employee benefits, R is the rent, Pr is the interest income on bank deposits, CS is the indirect taxes, A is the depreciation and the NPV is the foreign net factor income.

Nominal and real GDP

GDP is calculated in money; therefore, it is necessary to take into account the dynamics of prices during the reporting period. Therefore, there are two types of GDP.

Nominal is determined at current prices. It can increase in two cases: with an increase in production volumes and with an increase in prices. Real GDP is calculated taking into account the prices of the base period - the one taken as the basis. For example, in the United States, 1996.

Real GDP is an indicator of output, because raising or lowering prices does not change its indicator. To find real GDP, you must adjust the nominal to the price index. For this, the indicator of nominal GDP should be divided by a price index equal to the ratio of prices in the year under review to prices in the base.

To bring nominal GDP to a real indicator, you need to know the consumer price index or the GDP deflator. The CPI is affected by the cost of the 300 most frequently purchased goods, and the GDP deflator summarizes the change in prices for all goods.

PPP GDP adjustment

In order to ensure maximum objectivity in comparing the GDP of different countries, they calculate GDP at purchasing power parity (PPP). This is because, although the calculation of GDP in all world countries is in US dollars, this does not take into account the purchasing power of money in different countries and the difference in exchange rates. The number of identical products bought for $ 10, for example, in Canada and Nepal, will differ significantly. To eliminate the errors associated with the difference in the cost of living of different states, a method for calculating GDP by PPP was developed. This indicator will be most objective in determining the rating of the state economy.

GNP expenditure

Consumer spending (C) = household expenditure on current consumption + expenditure on durable goods (excluding household expenditure on housing) + expenses on services

Investment expenses (I) - this is the cost of firms and the purchase of investment goods. Investment goods are understood as goods that increase the capital stock:

  • fixed capital investments, which consist of the costs of firms: a) for the purchase of equipment, b) for industrial construction (industrial buildings and structures),
  • housing investment (household spending on housing),
  • investment in stocks (inventories include: a) stocks of raw materials and materials necessary to ensure the continuity of the production process, b) work in progress, which is associated with the technology of the production process, c) finished stocks (produced by the company), but not yet sold products.

Fixed investment = Investment in fixed assets + investment in housing

Investment in stocks = Stocks at the end of the year - Stocks at the beginning of the year = Δ
If the value of stocks increased, then GDP increases by the corresponding amount. If the value of stocks has decreased, which means that products manufactured and replenished in the previous year were sold in a given year, then the GDP of a given year should be reduced by the amount of stock reduction. Thus, investment in stocks can be both positive and negative.

Gross domestic private investment = net investment + depreciation (cost of capital consumed, recovery investment)

Net investment= net investment in fixed assets + net investment in housing construction + investment in stocks
In investment expenses in the system of national accounts, only private investments are included, i.e. investments of private firms (the private sector), and government investments that are part of government procurement of goods and services are not included. In this component of total costs, only domestic investment is taken into account, i.e. investments of resident firms in the economy of a given country. Foreign investments of resident firms and investments of foreign firms in the economy of a given country are included in net exports.

Government procurement of goods and services (G):

  • government consumption (maintenance costs of state institutions and organizations providing economic regulation, security and the rule of law, political management, social and industrial infrastructure, as well as payment for services (salaries) of public sector employees),
  • public investment (investment expenditures of state enterprises)

Government spending = transfer payments + interest payments on government bonds
Interest payments on government bonds are not taken into account in GDP, since government bonds are not issued for production purposes (this is neither a product nor a service), but in order to finance the state budget deficit.

Net export = income from exports - import costs

GNP income

Rent or rent - income from real estate (land, residential and non-residential premises)

Interest payments or interest - income from capital (interest paid on bonds of private firms)
Interest payments on government bonds are not taken into account in GDP.

Profit:

  • profit of the unincorporated sector of the economy, including sole (individual) firms and partnerships (this type of profit is called "owner’s income",
  • corporate sector profit:
    • corporate income tax (paid to the state),
    • dividends (distributed part of the profit) that the corporation pays to shareholders,
    • retained earnings of corporations, remaining after the settlement of the company with the state and shareholders, and serving as one of the internal sources of financing for net investments, which is the basis for the corporation to expand production, and for the economy as a whole - economic growth.

Indirect taxes = Taxes - Direct taxes