Gross Domestic Production (GDP) refers to the total monetary value of all final goods and services produced in the domestic territory of a country in a given period of time, usually, a financial year. Final goods here refer to those goods which are directly consumed and not used in further production processes. GDP can be calculated at factor cost (FC) as well as market prices (MP), i.e. GDP at market price = GDP at factor cost + Net indirect taxes (indirect taxes – subsidies).

The three main methods of GDP calculation are:

I.Expenditure Method: It measures the aggregate value of spending for final goods and services in an economy. It includes:

• Consumption Expenditure (C): Aggregate final private consumption expenditure in the economy.
• Government Expenditure (G): Aggregate final expenditure of the government of the economy (does not include government investment).
• Investment Expenditure (1): Aggregate investment expenditure received by all firms in the ceconomy (from both private sector and government).
• Net Exports (NX): Difference between aggregate exports (X) and imports (M) in an economy.
• Thus, GDP=C+G+I+NX

II. Product or Value Added Method

• GDP is calculated using the aggregate annual value of goods and services produced by all firms in an economy.
• Value added by a firm is the total value of production of the firm minus the value of intermediate goods used by the firm. Thus, Gross value added of firm i (GVAi) = Gross value of the output produced by the firm i – Value of intermediate goods used by the firm i.
• Thus GDP = Sum total of gross value added of all the firms in the economy.

III. Income Method It measures the sum total of all factor payments (remuneration from the factors of production i.e. rent from land, wages from labour, interest from capital, and profit from entrepreneurship). GDP is then estimated by calculating the sum total of all the rents, wages, interests, and profits in a particular year.

Difference between GDP and GNP:

GNP refers to the total monetary value of all final goods and services produced by the normal residents of a country during a financial year. GDP, on the other hand, is the monetary value of all final goods and services produced within the domestic territory of the country. In GDP calculation, all production done by the national residents and non-residents in a country gets included, regardless of whether production is owned by a local company or a foreign entity. The output produced outside the domestic territory of the country is not included in GDP. i.e., GNP GDP Income Earned by Nationals Outside Income earned by the foreign nationals inside or, GNP = GDP + net factor income from abroad (NFIA)