How Is GDP Calculated?

GDP, or gross domestic product, can be calculated in one of two ways. The first way is by adding up all of a country's expenditures over the year, while the second method adds up the total income generated in a country over the year.

The expenditure method is usually the more commonly used of the two, and it involves adding up total household spending, government spending, private investments and net exports, which are determined by subtracting total imports by the total amount of exports. To determine GDP using the income method, it is necessary to add up the total wages earned, rental incomes, interest incomes and business profits. Theoretically both methods should yield fairly similar results.

Both of these methods yield what is known as nominal GDP, which means the raw figures without taking inflation into account. However, in order to more accurately measure the growth rate of an economy, it is necessary to use the real GDP that is adjusted for inflation.

Some countries, like the U.S., produce statistics using both the income and expenditure methods. The U.S. GDP is calculated using the expenditure method, while the GDI is calculated using the income method. However, other countries, such as the U.K., combine both measurements into a total GDP.