What Is The Full Form Of GDP? (Definition And Calculation)

By Indeed Editorial Team

Updated 9 October 2022

Published 28 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

GDP is one of the most common metrics or indicators of national economic performance. Many professionals, including economists, analyse GDP to determine the overall monetary value of national economies. If you are a student or a working professional, learning about GDP is important to understand how a country's economic health factors in its overall development. In this article, we discuss the full form of GDP, its importance and its impact on micro and macroeconomics.

What Is The Full Form Of GDP?

The full form of GDP is Gross Domestic Product. It measures the monetary value of goods and services that a country produces and its consumers buy within a particular period. The period could be a quarter, half-year or a year. GDP also includes goods and services like defence and education, which are typically not for consumption. GDP does not include the monetary value of imported goods and services as the production happens outside the country.

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What Are The Different Types Of GDP Metrics?

There are several GDP metrics that pertain to different economic conditions and situations:

Nominal GDP

Nominal GDP measures the actual monetary value of goods and services a country produces in a certain period, such as a year or a fiscal quarter. Nominal GDP does not account for inflation, so historical nominal GDP calculations remain the same as inflation rises. For example, if a country has a nominal GDP of ₹100,00,00,000 originally measured in 1920, the nominal GDP for that country in 1920 remains at ₹100,00,00,000 even for an analysis 100 years later.

Real GDP

Real GDP accounts for inflation in its calculation of Gross Domestic Product. Real GDP takes the nominal value and adjusts it for inflation, often increasing the total value over time as the value of a currency decreases. For instance, if a country has a nominal GDP of ₹100,00,00,000 50 years ago and inflation has increased by 50% in the last 50 years, the real GDP for that country in that period is ₹150,00,00,000. Economists use the following formula to calculate this metric:

Nominal GDP x [1 + (Inflation percentage/100)] = Real GDP

GDP per capita

GDP per capita measures each individual's proportion of their country's GDP. It is the real or nominal GDP of a country as a fraction of the total number of citizens. For example, if a country has 10 crore people and a GDP of ₹100 crores, the GDP per capita is ₹10. Here is a formula for that calculation:

Nominal or Real GDP / Total population = GDP per capita

GDP growth rate

GDP growth rate measures how much the value of a country's GDP increases or decreases over a specific period. If a country's GDP increases over time, it has a positive growth rate. If the GDP decreases over time, it has a negative growth rate. For example, if a country's GDP was ₹100,00,00,000 in 1950 and ₹150,00,00,000 in 1951, then it has a growth rate of 50% between 1950 and 1951. Here is a formula for that calculation:

GDP growth rate = [(GDP in year two - GDP in year one) / GDP in year one] x 100

Purchasing Power Parity

Purchasing Power Parity (PPP) is a way to compare various countries' GDPs by accounting for the cost of living and local prices. Purchasing power parity adjusts all GDP values to a standard international currency, increasing the GDP value of countries with lower costs of living and decreasing the GDP value of countries with a higher cost of living. For example, if Vietnam has a lower GDP than the United States, but housing costs are significantly cheaper in Vietnam, the metric PPP may increase the value of Vietnam's GDP to account for these differences in housing costs.

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What Are The Methods Of GDP Calculation?

Economists and government and private agencies typically use one of three methods to calculate a nation's GDP. The three methods are the expenditure approach, the income approach and the production approach. They also adjust the data for inflation and population to arrive at an accurate figure. The GDP value that each of these methods generates is likely to arrive at the same or equivalent estimations:

Income approach

The formula to calculate GDP under the income approach is:

GDP = Total national income + Sales taxes + Depreciation + Net foreign factor income

Total national income is the sum total of all wages, profits, interests and rents. Sales tax is a tax that a government imposes when consumers buy goods and services. Depreciation is the value one attributes to an asset based on its useful life. Net foreign factor income is the difference between the total income that citizens and companies generate outside their country of origin and the total income generated by foreign citizens and companies within a country.

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Expenditure approach

The formula to calculate GDP under the expenditure approach is:

GDP = Consumption expenditure + Investment expenditure + Government expenditure + (Exports - Imports)

Consumption expenditure is the amount that consumers spend purchasing goods and services. Investment expenditure is the amount that a business spends for investing in a business and acquiring assets. Government expenditure is the amount it spends on welfare and development activities. (Exports - Imports) is the difference between the value of exports and imports of a country.

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Production or output approach

The formula to calculate GDP under the production approach is:

GDP = Real GDP - Taxes + Subsidies

This method calculates only the monetary value of the goods and services that a country produces.

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Who Calculates GDP In India And How Do They Do It?

The Central Statistics Office (CSO) calculates the GDP of the country. It collects data from various central and state government agencies and departments to calculate GDP accurately. CSO uses data across eight major industries to calculate the net change in value during a specific period. Relevant state and central government departments collect data using which the CSO estimates the factor cost GDP figure. These eight sectors are:

  • Agriculture, forestry and fishing

  • Mining and quarrying

  • Manufacturing

  • Electricity, gas, water supply and other utility services

  • Construction

  • Trade, hotels, transport, communication and broadcasting

  • Financial, real estate and professional services

  • Public administration and defence

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What Is The Purpose And Use Of GDP Data?

The primary purpose of GDP data is to measure a nation's economic growth. A growing value of GDP in comparison to previous years indicates that an economy is growing. For example, if the annual GDP growth rate of a country is 2%, it indicates that the country's economy has grown by 2% in comparison to the previous year. A negative GDP growth rate indicates that a country's economy is declining. If GDP is negative for two consecutive quarters, it indicates that a country's economy is going through a recession.

Recession can lead to low consumption, rising unemployment, reduced output of goods and services, decreased exchange rates, deflation of currency value and falling wages and incomes. Governments try to control and prevent recession by introducing measures to boost economic growth, like reducing tax, circulating more currency, lowering interest rates and increasing its spending on public projects. GDP figures also measure the economic performance of regions within national borders. This helps investors compare growth rates and identify the best investment opportunities in a country.

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What Is The Relation Between GDP And Macroeconomics?

Macroeconomics aggregates the economic activity of individuals, households, businesses and markets to analyse supply and demand trends in a country. The key indicators of macroeconomics include GDP, CPI, foreign exchange reserves, industrial and agricultural output, inflation, unemployment rate and current account deficits. Macroeconomics analyses how each of these indicators can affect the GDP of the country. Economists consider GDP as the best and most accurate indicator of economic growth. Policymakers and governments use GDP data to analyse if an economy is growing or contracting and formulate the country's fiscal and monetary policies accordingly.

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What Is The Relation Between GDP And Microeconomics?

Microeconomics is a realm of economics which studies how individuals and firms use and allocate resources. While it offers insights into how changes in market forces, price and resource availability can affect individual choices. Economists interlink it with the aggregate economy that they observe in macroeconomics. Microeconomic factors like a company's cost of production and labour economics reflect on the GDP of the country. An individual's consumption choices affect the market value of goods and services. GDP offers an insight into the economy as a whole, which is a metric that depends on individual and business decisions.

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Please note that none of the companies, institutions or organisations mentioned in this article are associated with Indeed.

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