What is the formula to calculate gross domestic product (GDP)?


Gross national product (GNP) is a slightly modified version of gross domestic product (GDP). GDP equals the value of all goods and services produced by citizens of the economy, plus the value of total imports of goods and services minus exported goods and services, regardless of where they are or where the money is made – in contrast to GDP, which limits the calculations within the country’s physical limits. GDP is more accurate when considering the geographical boundaries of the country’s economy, while GNP takes into account all the country’s citizens.

Suppose a US citizen moving to Scotland and opens a business for the manufacture of raincoats. GNP count this activity towards the total production of the United States, not the United Kingdom. On the contrary, GDP will take this activity to the British.

The official Formula GNP

A simplified version of the official GDP, the formula can be written as the sum of the consumption of citizens, government spending, investment, citizens, exports to foreign consumers and foreign firms domestic production minus domestic production by foreign firms.

Another way to calculate the GNP to take the figure of GDP, plus net factor income from abroad.

All the data on GDP on an annual basis and may be adjusted for inflation real GNP. In a sense, GDP represents the overall performance of all workers who can be legally defined with the home country.

There are a few problematic complications using GNP. – How about for those with dual citizenship. If the manufacturer of the coat has dual citizenship UK and USA, and both countries claim all of his performance, then his efforts will be counted twice in determining the global GNP.

Globalization and GNP

The global economy is becoming increasingly interconnected. It is possible for a citizen of one country to produce goods and services in many countries simultaneously over the Internet or with the help of modern supply chains. This causes the definitions and problems of calculation of calculation of GNP.

Partly for this reason, the Bureau of economic analysis (BEA) uses GDP instead of GNP. Modern macroeconomics emphasizes the importance of spending in the economy. Suppose that the German automaker will build a plant to manufacture cars in Alabama. According to demand theory jobs created in increase in the cost of Alabama, and economic growth in the United States, not Germany.

As the GNP and GDP to monitor economic growth by adding up the total income, but the income derived from GDP is much more geographically sensitive than the income derived from GDP.

Measurement Of Economic Growth

In fact, the US used GNP as official measures of economic welfare until 1991, after which he moved to GDP. However, some economists have questioned the validity of using GDP for comparison of different countries or the same economy in time.

The first issue, inflation can be handled by creating reliable price indices and adjustments to standard values. The second problem is the size of the population: China, India and many other opportunities for producers and consumers than, say, Switzerland or Ireland. Most economists advocate the use of GNP or GDP per capita taking into account the real impact of income growth on individuals.

There are other objections, but almost all contemporary accounts of the size and growth rate of the economy tracked in terms of GDP.

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