Measuring Gross Domestic Product | Economic Growth

This presentation provides a comprehensive overview of Gross Domestic Product (GDP), a crucial measure of economic activity within a country. We will examine the different methodologies employed to calculate GDP, such as the production, income, and expenditure methods.

2. What is Gross Domestic Product (GDP)?
•GDP is the measure of the total value of goods and services
produced in an economy in a particular period.
•It may be measured yearly or quarterly.
•GDP is the most common measure of national income.
•It indicates whether an economy is growing or not.
•It can be compared with previous years or periods.

3. Measurement of GDP
•Output method
•Income method
•Expenditure method

4. Measurement of GDP: Output method
•Summing up the output produced by all the industries or
sectors in an economy.
•The primary, secondary and tertiary sectors.
•Only the value added by each industry is considered to
avoid double counting.
•Value added = Sales Value –Cost of Inputs

5. Example of value added
Firms Cost of materialsSales valueValue added
Cocoa farmer (primary sector)$0 $200m $200m
Beverage maker (secondary sector)$200m $300m $100m
Beverage retailer (tertiary sector)$300m $80m
Total $500m $880m $380m
$380m

6. Measurement of GDP: Income method
•Adding all incomes earned for producing all the economy’s
goods and services in a given period.
•Only incomes accruing to factors of production are counted.
•Transfer payments, are not included, e.g. unemployment
benefits.

7. Measurement of GDP: Expenditure method
•Total final spending on all the goods and services produced
in the economy.
•It is given as :
GDP = C + I + G + (X-M)
where
C = Consumption, I = Investment, G = Government spending,
X-M = Net exports, X= Exports, M = Imports.

8. Measurement of GDP: Expenditure method
•Consumption (C): Total spending on goods and services by
households and individuals in an economy, e.g. spending on
food.
•Investment (I): Spending by businesses on capital goods,
e.g. machinery, equipment, factories.
•Government spending (G): Spending by government on
goods, services and investment, e.g. spending on roads,
schools and hospitals.
•Net exports (X-M): Difference between value of exports and
value of imports.

9. GDP Per Head
•It measures the average income in a country.
•It is obtained by dividing GDP by the population.
•It is also called GDP Per Capita.

10. Nominal GDP and Real GDP
•Nominal GDP is the monetary value of goods and services
produced in an economy before adjusting for inflation.
•Real GDP is GDP that has been adjusted for inflation.

11. Calculating Real GDP
•This is obtained by calculating GDP in a particular year in
terms of the prices in a base year.
Nominal GDP computation in 2022
Goods Average priceQuantityValue
Rice $5 3m $5 x 3m = $15m
Beans $7 3m $7 x 3m = $21m
Yams $2 2m $2 x 2m = $4m
Total $40m

12. Calculating Real GDP
•This is obtained by calculating GDP in a particular year in
terms of the prices of a base year.
Nominal and Real GDP computation in 2023
Goods Average
price
QuantityValue Value using 2022
prices
Rice $8 2m $8 x 2m = $16m $5 x 2m= $10m
Beans $9 2.5m $9 x 2.5m = $22.5m$7 x 2.5m =
$17.5m
Yams $5 1m $5 x 1m = $5m $2 x 1m = $2m
Total $43.5m $29.5m
Nominal GDP2023 Real GDP2023

13. Problems in measuring GDP
•Some economic activities are not recorded (hidden,or
underground economy).
•Non-marketed products are exchanged without money
being used, e.g. work done for oneself, or voluntary work.
•Non-availability of data: Accurate and adequate production
and cost data may not be available, i.e. no machinery for
data collection.