GROSS DOMESTIC PRODUCT

It is the calculation of the whole country´s economic activity; all activities (production of good and services) done inside a country during a certain period of time. It is also referred to as its acronym GDP.

Since the term has the adjective “gross” it means that the capital consumptions are not deducted. Also, this indicator is used as a way to evaluate the level of economic wealth of each country. It is different from Gross National Product (GNP) in that this term shows any activity that took place around the whole world by companies or residents belonging to the country being evaluated, while in GDP only accounts for the activities carried out within the country.

One way to calculate GDP is with the Expenditure Approach, which is the total amount spend on final goods and services produced in a nation by households, firms, the government and foreigners. It is calculated as the sum of private consumption (C), investment (I), government expenditures or spending (G), and net exports (exports minus the country´s imports, X-M).

In other words, GDP=C+I+G+(X-M). Another common way to measure GDP is with the income Approach, which is the total income earned by households in a nation in one year. It is calculated as the sum of Compensation Of Employees (wages, salaries and social security), Gross Operating surplus (corporate profits), Gross Mixed income (non-corporate profits) and taxes minus Subsidies (on production and imports). In other words, GDP=COE+GOS+GMI+(T-S).

Yet another way to calculate GDP based on income is to add Rents, interests, Profits, Statistical Adjustments and Wages, or RIPSAW=GDP. Some countries, like the U.S., have changed the way they calculate the investment variable and now are including Research and Development (R&D) expenditures. This will effectively raise GDP levels, both nominally and historically.