For economists, investors and anyone involved in finances, the Gross Domestic Product (or GDP) of a country is very important to know and understand.
What is Gross Domestic Product?
The Gross Domestic Product (otherwise known as the GDP) of a country is an engrossing monetary value (stated in the country’s own currency) of all goods and services produced by a country within a defined time period.
How is it calculated?
GDP can be calculated using two formulae;
- The Expenditure Approach involves the following formula:
Where:
C is consumption (which includes all private spending done on all kinds of goods and services)
G is government spending (which includes employee salaries, government funded construction, public schooling and military related spending)
I is investments made by the country
NX is the country’s net exports
- The Income Approach involves the following formula:
GDP = Total National Income + Sales Tax + Depreciation + Net Foreign Factor Income
Where:
The Total National Income includes the total of all wages, profits, interest and rent.
Sales Tax includes all government issued taxes on goods and services for consumers.
Depreciation includes the value of an asset for its usefulness.
Net Foreign Factor Income is the difference between the income that is generated by the citizens and companies working abroad and the income that is generated by foreign citizens and companies within the country.
Examples:
Using The Expenditure Approach;
| Interest Income | Ksh.20,000 |
| Consumption | Ksh.40,000 |
| Investment | Ksh.350,000 |
| Net Export | Ksh.550,000 |
| Wages | Ksh.100,000 |
| Government Revenue | Ksh.2,500.000 |
GDP = C + I + NX
= 40,000 + 350,000 + 550,000
= 940,000
Using the income approach;
| Net Foreign Factor Income | Ksh.600,000 |
| Government Revenue | Ksh. 2,500,000 |
| Sales Tax | Ksh.300,000 |
| Wages | Ksh.500,000 |
| Depreciation | Ksh.150,000 |
| Household Consumption | Ksh.350,000 |
| Total National Income | Ksh.5,000,000 |
| Net Export | Ksh.4,000,000 |
GDP = Total National Income + Sales Tax + Depreciation + Net Foreign Factor Income
= 5,000,000 + 300,000 + 150,000 + 600,000
= 6,050,000
