How is Gross Domestic Product (GDP) calculated?

GDP is calculated by summing up consumption, investment, government spending, and net exports in a country.

Gross Domestic Product (GDP) is a measure of economic activity within a country. It's the total value of all goods and services produced over a specific time period. The calculation of GDP is done using one of the three methods: the output (or production) approach, the income approach, or the expenditure approach. However, the most commonly used method is the expenditure approach.

The expenditure approach calculates GDP by adding up all the spending on final goods and services produced within a country in a given period. This includes consumption (C), investment (I), government spending (G), and net exports (X-M), which is exports minus imports. The formula is represented as GDP = C + I + G + (X-M).

Consumption refers to private consumption expenditures or consumer spending. It's the measure of all goods and services bought by households and non-profit institutions. Investment includes business investments in equipment and the purchase of new housing. Government spending is the sum of government expenditures on final goods and services, including salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. Net exports represent the difference between what a country exports and imports. If a country exports more than it imports, net exports are positive, contributing to GDP. If it imports more than it exports, net exports are negative, reducing GDP.

The income approach, another method of calculating GDP, sums up all the income earned by households and firms in the country. This includes wages, rents, interest, and profits. The output approach, on the other hand, calculates the value of all goods and services produced in the country.

It's important to note that GDP only includes the value of final goods and services to avoid double counting. For example, the value of steel used in a car is not counted separately as it's already included in the final value of the car. Also, GDP does not include transactions without a market, such as household chores, or illegal activities.