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What Is GDP?

Views 3952022.07.04

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Core points

  • Gross domestic product (GDP for short) refers to the market value of all final products and services produced in the economy of a country or region within a certain period of time.

  • Gross domestic product (GDP) is the core indicator of national economic accounting, and it is also recognized as the best indicator to measure the economic status of a country or region.

  • There are three accounting methods for GDP: expenditure method, production method and income method.

    Detailed explanation of concept

    Gross domestic product (Gross Domestic Product, abbreviation: GDP) is all the final results (including products and services) produced by all resident units in a country or region in a certain period of time calculated according to the market price.

    Gross domestic product (GDP) is the core indicator of national economic accounting, and it is also recognized as the best indicator to measure the economic status of a country or region.

    Three methods of calculating GDP

    There are three methods of GDP accounting, namely, production method, income method and expenditure method. The three calculation methods reflect the final results of national economic production activities from different angles.

    • Expenditure method

    The expenditure method is a method to measure the final results of production activities of all resident units during the accounting period from the point of view of the final use of goods and services. It includes three parts: final consumption expenditure, total capital formation and net export of goods and services.

    Accounting formula: GDP = final consumption expenditure + total capital formation + net exports of goods and services = (household consumption expenditure + government consumption expenditure) + (total fixed capital formation + inventory increase) + (exports of goods and services-imports of goods and services)

    • Production method

    Production method is a method to measure the final results of production activities during the accounting period from the point of view that resident units create new value in the production process. That is, from the value of goods and services created in the production process, the value added is obtained by deducting the value of intermediate goods and services invested in the production process. The added value of the production method of each industry of the national economy is added to get the GDP of the production method.

    Accounting formula: GDP= total output-intermediate input

    • Income method

    Income method is a method to reflect the final results of production activities during the accounting period from the point of view of income formed by resident units in the production process. According to this accounting method, the added value is obtained by the addition of labourers' remuneration, net production tax, depreciation of fixed assets and operating surplus. The sum of the added value of the income method in all sectors of the national economy is equal to the gross domestic product of France.

    Accounting formula: GDP= labourers' remuneration + net production tax + depreciation of fixed assets + operating surplus

    In theory, the results of GDP calculated by three different methods should be consistent, but in practice, due to different data sources, the results obtained by different calculation methods will be different, which is called statistical error. Statistical error is allowed to exist within an acceptable range.

    Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.
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