GDP - gross domestic product: what it is in simple words, how to calculate

Gross Domestic Product (GDP) is the sum total of goods and services produced in a state and ready for any use, be it consumption, export or accumulation. This macroeconomic indicator reflects the market value of products, regardless of the ownership of the actual means of production. Explanation:

• gross – denotes the totality of values;
• internal indicates territoriality, that is, the creation of goods within the borders of a certain country

If we explain what GDP is in economics in simple words, it is necessary to clarify that GDP collects the results of the functioning of all production facilities in the state, even if they belong to residents of foreign countries or are a branch of a foreign company and are under the control of foreign capital.

GDP is one of the key indicators that quantitatively expresses economic development. It illustrates in the most general form how an economy grows as well as how it develops. The reporting period is most often taken to be a year.

The GDP of countries is indicated in national currency and is recalculated at the exchange rate. However, in order to more accurately compare the development of the economies of world states, it is often expressed in terms of purchasing power parity.

The structure of each state's GDP is unique and depends on what part of the income, for example, industry brought to the state in the reporting year. Also, the structure can be characterized in different ways: in terms of production, use and income generation.

The World Bank database contains information on the GDP of all countries in the world, expressed in dollars. Statistics of changes are recorded there throughout the year and updated annually, after which they are published.

What is GDP

GDP is gross domestic product. This is an economic indicator that denotes the total market value of goods and services produced in the territory of the state in one year

. It is used in calculations of a country's economic growth.

In simple words, GDP is the total market value of all final goods and services that are consumed in the territory of the state over 1 year

.

When calculating this indicator, only those purchase/sale transactions that have been officially registered are taken into account. For example, a citizen is an individual entrepreneur. He repairs household appliances. If all of its transactions were officially recorded through accounting, their figures will be included in GDP.

When calculating GDP, sectors of the shadow economy are not taken into account. That is, those goods and services that were produced informally.

It is also worth considering that the calculation of GDP does not include transfer payments and non-productive transactions. These include transfers from the budget as assistance.

Why does GDP take into account only the final cost of production?

? This is necessary to avoid double counting of the indicator.

Let's look at an example. The farmer grew grain and then sold it to a flour mill. There it was ground into flour. It was sold to a factory or enterprise that deals with baking. Buns or bread were baked from it. After that, these products were sold. And the cost at which they were sold is taken into account when calculating GDP. She is the ultimate.

Answers to readers' questions

– What is GDP in Purchasing Power Parity – Purchasing Power Parity (PPP) is similar to exchange rates. Only the basis is not the stock market balance, but the product balance. 1 US dollar can buy one loaf of bread. The same loaf can be bought for 40 rubles. Accordingly, the purchasing power parity for the price of bread is 1 dollar to 40 rubles. And Russia’s GDP at PPP will be converted into dollars not at the official rate, say, 66 rubles, but at 40 rubles, that is, it will be 30% higher than the nominal one. And to avoid distortions, the calculations are based not on just bread, but on a set of several hundred products and services. Accordingly, Russia's GDP according to PPP is always higher than real or nominal GDP, since the ruble is undervalued on the stock exchange.

– What is GDP per capita? – The GDP per capita indicator allows you to determine and further monitor the level of well-being of the population. This is GDP divided by the number of inhabitants of the territory (for example, a country or region). According to Rosstat, 146,793,744 people lived in Russia as of January 1, 2021. The country's real GDP, according to the same department, is $1.267 trillion. We divide the second indicator by the first and get: 1267 billion / 146.8 million = 8.63 thousand dollars or approximately 570 thousand rubles. This is 73rd place in the world. For comparison: the leaders are now Luxembourg ($110 thousand), Switzerland ($80 thousand) and Norway ($73.7 thousand). The ranking of countries is greatly influenced by population size and economic structure. In Switzerland there are few people, but there are many banks - hence the high result. And one of the leaders in absolute GDP in the world - China - due to the huge number of inhabitants, is located next to Russia - in the eighth ten countries in terms of GDP per capita.

But in terms of GDP per capita at purchasing power parity, the situation is different. Here, for each Russian there are 25.5 thousand dollars, and this is 53rd place, between Romania and Croatia. The leading positions are held by Qatar, Macau, Luxembourg and Singapore. Such figures indicate that while the level of production and income of citizens in Russia is not the highest, prices for manufactured goods are also low. This makes it possible to ensure a decent global average level of population consumption. Another thing is that this average level is a very conditional indicator, and not the majority of Russians have it.

– Why is GDP calculated either in rubles or in dollars? – Any methodology for calculating GDP allows you to calculate this indicator both in national and in any other currency. For the purposes of domestic planning and statistics in the Russian Federation, the volume of gross domestic product is announced in rubles. For comparison with other countries, as well as for publications in international media and statistical collections, the GDP of the Russian Federation is calculated in dollars at the average exchange rate of the Central Bank of the Russian Federation for the reporting period (year, quarter, month).

– How accurate is the GDP indicator? – The level of gross domestic product is not an exact calculation of the volume of the economy, but an indication of the dynamics of its development. Many economists (including the author of the term, Simon Kuznets) believe that there is no direct relationship between GDP growth and an increase in the welfare of the state, since, for example, taking into account financial flows only from production and sales in GDP gives a one-sided picture of economic development.

Accounting for operations that reduce natural capital (all products that nature provides - minerals, vegetation, wildlife, etc.) as income (a logging company reduces the amount of natural capital by cutting down trees, selling them and receiving income) is actually encourages depletion of natural resources.

The growth of this component of GDP indicates, rather, the prerequisites for a future decline in economic indicators - coal mining is gradually leading to the depletion of deposits and a decline in coal production.

In addition, the calculation of GDP gives a lot of room for manipulation, since the statistical agency, as a rule, reports to the government of the country, which has a direct interest in the growth of gross domestic product. For example, over the past 3 years, the size of Russia's GDP was twice recalculated by Rosstat upward, and both times this recalculation coincided with the pre-election periods. However, there are other opinions.

The Ministry of Economic Development of the Russian Federation, for example, considers real GDP growth of 3% per year a strategic target, since they are confident that upon reaching this indicator, complete economic stability will occur.

The Department of International Capital Markets of the IMEMO RAS explains the discrepancies between some indicators within the framework of GDP by the presence of the shadow sector of the economy. For example, it is difficult to take into account the income of people working for “gray” salaries. When calculating GDP by expenditure or value added, this inaccuracy is relatively leveled out, but others arise - associated, for example, with double counting of the same manufactured products sold twice during the year, and so on.

Despite this, the independent FBK Institute for Strategic Analysis notes that, in general, the calculation of GDP is close to reality and even attempts to “move” it in one direction or another do not make big changes to the overall picture of economic development.

– Where can I find data on a country’s GDP? – Information on Russia’s GDP for previous periods is calculated and published by Rosstat on its website in the “National Accounts” section: Here, in the “Gross Domestic Product” section, data on GDP dynamics since 1996 is posted in current and constant prices, as well as in comparison with previous ones for years.

Information on the GDP of other countries in the original can be obtained on the IMF website in the “Data” section. The World Bank also conducts its calculation of GDP. Its website provides the dynamics of world GDP since 1990, as well as an estimate of the gross domestic product for all countries of the world.

GDP statistics by nominal volume are maintained by the United Nations (UN), their data is located on this website.

Rosstat has been providing information to all these bodies since the late 1980s. Internal statistics in Russia (“system of national accounts”) are also maintained in accordance with the standards of international financial organizations.

Why is GDP needed?

It reflects the economic state of the state. GDP influences the performance of stock indices, exchange rates on stock exchanges, state monetary policy and other sectors of life.

Also, do not forget that the higher the GDP, the lower the unemployment rate in the country. But this is a controversial issue. If GDP rises by at least 2% every year, the unemployment rate remains unchanged.

The higher the GDP, the stronger the national currency. This means that the welfare of citizens is growing. Is it really? Not really. The indicator cannot accurately determine the well-being of citizens. GDP can be significant in relation to each citizen, but the standard of living will be low.

What will GDP tell a market participant? Rules of interpretation

The GDP value reflects fluctuations in the cost of services and consumer products within the country. When calculating the indicator, real inflation processes are taken into account. This makes GDP one of the key indicators of the foreign exchange market. Players' attention is focused on data on developed countries. Information about the GDP of the USA, England and China has a particular impact on exchange rates. Don't neglect the data for New Zealand, Canada and Australia.

It is not only the final reports of government agencies that are subject to evaluation; analysts also often make forecasts based on preliminary reports. The mood of the players is also influenced by the revised data. Opening access to GDP provokes jumps of varying amplitude; in practice, changes of up to 150 points were recorded.

By receiving information about the GDP of the world's leading countries, foreign exchange market participants can assess:

• general economic activity in the country;
• state of production;
• employment level;
• consumption;
• volume of retail trade.

If GDP turns out to be higher than predicted values, the exchange rate of the national currency increases. A decrease in the indicator is a signal of a decline.

Schedule for the publication of GDP data in different countries

The publication of reports is carried out by authorized bodies. Market participants can find the latest data on the official websites of statistical agencies or financial departments. Information is instantly duplicated by professional publications. Among these are, for example, Bloomberg.

1. USA and Canada. On the 30th day after the end of the quarter, specialists from the Bureau of Economic Analysis post the report on the pages of the open portal. Documents become publicly available at 8:30 a.m. Eastern time. Information on Canada's GDP can be obtained on the website of the national statistics agency. Documents are posted online 2 months after the end of the reporting period
2. Australia. Information on the state's gross domestic product appears on the website of the statistical bureau after 65 days from the end of the quarter. Access to data opens at 9:30 am. At the same time, experts adhere to the general time standard - the North American Eastern region.
3. China. The National Statistical Authority of China publishes the report at 22:00. Information is posted on the 18th day after the end of the quarter.
4. England. The UK Statistics Agency is responsible for summarizing the results. The report appears on the official website at 5:30 am. Interestingly, preliminary data is published after one day from the end of the period. Accurate information becomes available to participants after a month.
5. New Zealand. The statistical office of this country publishes reports later than everyone else. Documents appear on the website only 80 days after the end of the quarter.

Types of GDP

There are several varieties of Gross Domestic Product:

• nominal;
• real.

Nominal GDP

- the cost of produced final goods and services in the region or the entire country, which is expressed in prices for the current period of time.

Real GDP

— comparison of physical volumes of goods and services produced over a certain time period.

The difference between nominal GDP and real GDP is that the latter does not depend on the level of inflation. When calculating it, fluctuations in prices for products and services are not taken into account. And when calculating nominal GDP, the rise and fall of prices and the income of certain sectors of the economy are taken into account.

There is also another classification of GDP:

• Actual - when calculating it, underemployment of the population and realized economic opportunities are taken into account.
• Net - It shows the volume of all goods and services produced minus depreciation expenses.
• Potential - this indicator is calculated taking into account full employment of the population. It shows the economic potential of the state.

When calculating the Gross Domestic Product, only official data from reports of enterprises in various fields of activity are taken into account.

Where is the value used, how to calculate it

Calculation of the gross national product makes it possible to draw conclusions about the solvency of the population. From an economic point of view, it shows a more complete picture of the income generated by the country.

Gross national product is equal to the sum of GDP and the statistical indicator. To calculate the latter, it is necessary to subtract from the primary income received by non-residents in the country the income received by residents abroad.

According to UN recommendations, since 1993 GNP has rarely been used to assess the economic condition of a country. It has been replaced by the more accurate gross national income (GNI).

GDP structure

It includes all economic and social sectors, key sources of income. In addition, when calculating GDP, states take into account the GDP indicators of each region.

Indicators of Gross Domestic Product are calculated for the following sectors:

• extraction of natural resources;
• energy industry;
• Agriculture;
• construction;
• industrial manufacturing;
• transport industry;
• health and education;
• hotel and restaurant business;
• trade sphere;
• finance;
• other services.

For each year, the state provides data on what level the GDP indicator of a particular production or industrial area is at. Based on the obtained indicators, an analysis of the economic growth of the state as a whole is made.

Outdated measure of well-being

Many economists have criticized the need to calculate GDP. According to them, the indicator does not take into account long-term prospects: high-tech products, depletion of natural resources, etc.

In addition, during the calculations the results of the work of “shadow” enterprises are not taken into account. This means that official GDP figures are always lower than they actually are.

Alternative options for determining the level of well-being of a country's economy have not yet gained popularity, so most states continue to pursue an increase in GDP. Although it is worth noting that in addition to it, other indicators are also assessed: net national product, gross national product, actual and potential GDP.

What is GDP per capita

This is a macroeconomic indicator that reflects the state of all sectors of the economy in relation to each citizen of the state

.

Formula for calculating GDP per capita:

Total GDP / number of citizens of the country

Let's look at an example.

Let's assume that the GDP for the year was 100 million rubles. The country's population is 10 million people. We calculate using the formula:

100 000 000 / 10 000 = 10 000

Therefore, GDP per capita will be 10,000 rubles.

Sometimes GDP is calculated only taking into account minors. In this case, the “equivalent of minors” is taken as a basis. What does this mean? Different weight measures are used. That is, the younger the child, the less his weight.

GDP per capita indicators in Russia for several years

If we compare the figures for 2015 and 2021, GDP has grown significantly. That is, the economic situation in the country began to stabilize. The state supports the production of the national product. Accordingly, the domestic market does not suffer from a shortage of imported goods. It is also necessary to note the strengthening of the national currency in 2021.

Comments: 1

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Author of the article: Klavdiya Treskova

Consultant, author Popovich Anna

Financial author Olga Pikhotskaya

1. Anonymous
   01/31/2021 at 03:39 A wonderful, sensible and intelligible article.
   It was nice to meet you, I will look for the author's books! Reply ↓

How is GDP calculated?

There are several calculation methods:

• by expenses;
• by income;
• at added value.

They all give the same result. This is due to the fact that in the economy the amount of added value is equal to the cost of the final product, and total income is equal to the amount of total expenditure. Let's look at each of these methods.

Calculation of GDP by expenditure

This method of counting is called the “end-use method.” When calculating GDP based on expenses, the sum of expenses of all agents is taken into account. These include the following expenses:

• investment;
• government;
• consumer;
• foreign sector expenditures (net export expenditures).

GDP is calculated using the formula

:

I + G + C + Xn

where: I – investment costs; G – government expenditures (purchase of goods, payment for services); C – consumer spending; Xn – expenses on net exports (foreign sector).

In other words, the expenditure method takes into account the amount of final consumption

(costs of residents of the country to purchase goods or pay for services),
investment capital
(investments for production improvements, other investments to increase the profit of the enterprise);
government expenses for paying salaries of employees of budgetary organizations, defense costs,
etc.
Also for the calculation, the net export indicator is determined
. To do this, the amount of imported goods is subtracted from the amount of goods sent abroad.

Calculation of GDP by income

This method is called "distributive". When using it, the following factor income indicators are taken into account:

:

• wages, bonuses, incentives and the like;
• rent/rent (income received from renting out property);
• interest payments, which are income from capital investment;
• profit of enterprises and organizations (corporate and non-corporate sectors of the economy).

Also taken into account when calculating

two indicators that are not factor incomes. These include indirect taxes and depreciation.

Formula for calculating GDP by income:

Salary + rent + interest payments + enterprise profits + owner income + depreciation + indirect taxes

Imputed rent must be included in the rent figure.

Calculation of GDP by value added

In this method, the calculation uses indicators of added value of products minus tax payments and contributions. The value added indicator is calculated as the difference between revenues and expenses. Then the obtained values ​​are summed up.

Let's look at an example.

The farmer sold grain to the miller for 10 rubles/kg . He, in turn, ground it and sold it to a bakery for 15 rubles/kg (DS = 5 rubles). The bakery baked bread and sold it to the store for 19 rubles. (DS = 4 rubles), and the store sold bread at a price of 25 rubles . (DS = 6 rubles). The total amount of added value was 15 rubles.

How are they calculated?

The calculation of GDP indicators is carried out by state statistical bodies and the Ministry of Economy. The final information is published on the Rosstat website.

Three calculation methods are used, which should ultimately give the same result:

1. By expenses . The calculation is based on the simultaneous consideration of national income, depreciation and indirect taxes. Subsidies are deducted from the amount received, as well as income received by foreigners who worked in Russia. National income includes all wages paid in the country, rent payments, interest payments and corporate profits.
2. By income . This methodology is based on the summation of final consumption, investment in the company, government spending and net exports. To calculate net exports, the difference between a country's total exports and imports is measured. The indicator can be either positive or negative.
3. Value-added basis , an alternative name for production method . To obtain the result of calculating the indicator using this method, all added value by industry in the state is taken into account. The indicator depends on both the markup and the costs associated with production. That is, if an enterprise manages to reduce production costs, this will lead to an increase in the level of GDP.

GDP is calculated:

• in Russian rubles;
• in any other currency, at the current exchange rate, or in US dollars.

Dollar counts are used to compare rates across countries. Based on the data obtained, world or international rankings are compiled, comparisons are made between categories or the level of economic development of several states.

Dynamics of Russia's GDP

Schedule for December 1, 2021.

According to Rosstat, the index of physical volume of GDP has changed since 2014. Changes became noticeable already in 2021, when the indicator initially had a negative value, and then a positive one.

In 2014-2018, there was a reduction in the share of household expenditures on final consumption of goods and services. The share of exports increased, which could not but have a positive impact on the country's economy. However, in 2016-2017 the share of remuneration to employees decreased. This means that unemployment has increased. GDP did not reach the required value. Therefore, in 2021 its indicator is not too different from 2014.

As for the 2021 GDP, its figure has increased significantly compared to previous years. The national currency strengthened, the GDP growth rate was 102.3%. Its value reached 103,876 billion rubles.

Main differences between GNP and GDP

Often the concepts of GDP and GNP are confused, or even replaced with one another, but this is wrong. Below is a table of the main differences between these two indicators.

Story

Everyone is familiar with the abbreviation GDP. This is the gross domestic product, calculated at prices of the year of manufacture. Both of these indicators are a reflection of the economic performance over the past year.

The term GDP itself came from America, its forefather was the economist Simon Kuznets, who at the beginning of the twentieth century made calculations to determine the US national income. For these developments, he was even awarded the Nobel Prize, as they were highlighted as a significant contribution to the development of the economy.

However, this term and everything connected with it began to be used most widely after 1991.

Many economists were and remain against the very concept and methods of calculating GDP. This is due to the fact that GDP is based only on the basis of monetary transactions, so the whole picture does not appear fully. Despite this, this term is widely used in all countries and, moreover, the entire world economy is built on this indicator.