Approaches to Calculating GDP

This document discusses the different approaches to calculating GDP, including the expenditures approach and the income approach. It explains the concepts of nominal GDP and real GDP, and analyzes the relationship between GDP and GNP. The document also provides insights into GDP data from different countries.

Running Head: APPROACHES TO CALCULATING GDP 1
Approaches to Calculating GDP
Student’s Name
University Affiliation

APPROACHES TO CALCULATING GDP 2
Approaches to Calculating GDP
Part 1: Expenditures Approach to Calculating GDP
1. Using Table 3: Gross Domestic Product: Level and Change from Preceding Period
a. The following information for the last quarter was obtained from table 3(in chained
2012 billion dollars):
i. Gross domestic product
20,891.4
ii. Personal consumption expenditures
14,200.6
iii. Gross private domestic investment
3,774.6
iv. Net exports of goods and services
-659.8
v. Government consumption expenditures and gross investment
3,575.9
The last Quarter Data
Component Amount
Gross Domestic Product 20,891.4
Personal Consumption
Expenditure
14,200.6
Gross Private Domestic
Investment
3,774.6
Net Exports of Goods and
Services
-659.8
Government
Consumption Expenditure
and Gross Investment
3,575.9
Bureau of Economic Analysis USA (2019)
b. Calculate the percentage (the proportion) of each category in nominal GDP and in real
GDP.
Using Nominal GDP:
The nominal GDP for the last quarter 0f 2018 was 20,891.4
[Personal consumption expenditures / Nominal GDP] *100%
14,200.6
20,891.4 ×100%= 67.97%
[Gross private domestic investment / Nominal GDP] *100%

APPROACHES TO CALCULATING GDP 3
3,774.6
20,891.4 × 100 %=18.07%
[Net exports of goods and services / Nominal GDP] *100%
−659.8
20,891.4 × 100 %= 3.15%
Government consumption expenditures and gross investment/ Nominal GDP] *100%
3,575.9
20,891.4 × 100 %=¿17.12%
And using Real GDP:
The real GDP for the last quarter of 2018 was 18,784.6
[Personal consumption expenditures / Real GDP] *100%
13,044.2
18,784.6 ×100 %=69.44%
[Gross private domestic investment / Real] *100%
3,474.7
18,784.6 ×100 %=18.50%
[Net exports of goods and services / Real GDP] *100%
−963.2
18,784.6 ×100 %=-5.13%
[Government consumption expenditures and gross investment/ Real GDP] *100%
3,195.3
18,784.6 ×100 %=17.01%
Component Amount Proportion of nominal
GDP(Amount/ Nominal
GDP) GDP=20,891.4
Personal Consumption
Expenditure
14,200.6 67.97%
Gross Private Domestic
Investment
3,774.6 18.50%
Net Exports of Goods and
Services
-659.8 -3.15%
Government Consumption
Expenditures and Gross
3,575.9 17.12%

APPROACHES TO CALCULATING GDP 4
Investment
Component Amount Proportion of Real
GDP( Amount/Real GDP )
GDP=18,784.6
Personal Consumption
Expenditures
13,044.2 69.44%
Gross Private Domestic
Investment
3,474.7 18.50%
Net Exports of Goods and
Services
-963.2 -5.13%
Government Consumption
Expenditure
3,195.3 17.01%
Source: Bureau of Economic Analysis USA (2019)
2. Analysis of the results and reflection
Nominal GDP vs Real GDP
From the results in the tables above, it is clear that the nominal GDP is greater than the
real GDP at all levels. Nominal GDP is not corrected of inflation effects, something done on the
real GDP. Therefore, the real GDP yield a lower value since inflation is essentially a positive
number. Whenever the price level increases, the corrected value of GDP is expected to be lower.
In the data provided above, the overall nominal GDP is presented as $20,891.4 billion. The
figure dwarfs the real GDP (at $18,784.6 billion) by $ 2 ,106.8 billion.
Category taking the largest proportion of GDP
In the year 2018, the data provided shows that personal consumption expenditures
constituted 67.97% and 69.44% of the nominal and real GDP respectively. The expenditures
imply also that the personal income forms the largest part of the GDP of a given nation. Based
on the results, the net exports of goods and services comprises of the smallest category of the
GDP. In 2018, it averaged at a deficit of 3.15% and 5.13% of the nominal and real GDP in that
order.

APPROACHES TO CALCULATING GDP 5
The Gross Private Domestic Investment
Gross private domestic investment is the measure of amount of private business capital
that investors spend on acquiring new property or inventory in an economy. The NI measure here
does not include investments on purchase of bonds or other financial assets. In lieu, it involves
purchase of tangible assets such as capital goods, structures and stock used in production of other
goods and services as illustrated by Mankiw (2015).
Net Exports and why it is negative
Conceivably, the data from the above tables shows a negative value for the net exports of
goods and services. That is so because the country exported less goods and services than it
imported throughout the year 2018. Table 3, from whence the net exports data was extracted,
shows that the exports were worth $2,530.9 billion whereas the imports were worth $3,156.5
billion in nominal terms which gives a net outflow of income of $659.8 billion.
National defense as a proportion of government consumption expenditure and GDP
investment
National defense constituted $799.9 billion of the $3,575.9 billion spent on government
consumption expenditures and gross investment. That translates to 799.9
3,575.9 ×100 %=¿22.3% of
the government consumption expenditures and gross investment and 3.83% of the GDP that
quarter. Overly, the expenditure on national defense comprised of 3.8% of the total GDP in
2018.

APPROACHES TO CALCULATING GDP 6
From the data provided above, it can be learnt that the value of net exports is not always
positive. It sometimes gives a negative figure implying that during that period, the country in
question imported goods and services which had a larger value than what they could export
during that period. It can also be learned that, personal consumption expenditure normally
constitutes the largest part of national income.
The real GDP is always greater than the real GDP because it is calculated based on
inflated market prices which are subject to adjustments. It was learned that for one to obtain the
real GDP, the nominal GDP must first be corrected of inflation. The ratio between the nominal
GDP and the real GDP is the GDP deflator.
Finally, it was learnt that the income approach is generally based on the assumption that
all the spending on goods and services in an economy should be equal to the income obtained
from all goods and services in that economy.

APPROACHES TO CALCULATING GDP 7
Part 2: Income Approach to Calculating GDP
Item Year
total
1st Quarter 2nd
Quarter
3rd Quarter 4th Quarter
Gross domestic product 20,500.6 20,041.0 20,411.9 20,658.2 20,891.4
Gross national product 20,755.5 20,309.8 20,678.9 20,913.3 21,120.0
Net national product 17481.3 17106.4 17425.1 17615.6 17779.4
National income 17,544.0 17,266.2 17,423.7 17,673.9 17,812.2
Personal income 17,582.4 17,319.2 17,466.7 17,657.3 17,882.4
Source: Bureau of Economic Analysis USA (2019)
GDP vs GNP
Both the GDP and the GNP show the national income and output over a specified period.
However, they have a difference. GNP includes the value of all goods and services that the
nationals of a given country produce whether within the borders of the country or abroad.
Conversely, the GDP measures the value of all goods and services produced within a given
country without adding the net factor payment from abroad (Krugman, 2012).
The GDP fluctuates across periods because of the existence of business cycles. It is
observed that whenever the economy is in boom, the GDP increases whereas it decreases if the
economy is facing a recession. From the data shown above the economy is expanding since rises
from $ 20,041.0 billion recorded in the first quarter to $ 20,891.4 billion recorded in the last
quarter. Investment spending facilitates growth of both employment and the general GDP.
During a recession such prosperity may not be present and it may call for a government fiscal
stimulus or monetary intervention to bring back the economy to the growth phase.

APPROACHES TO CALCULATING GDP 8
Adjustments made on GDP to obtain GNP
According to Schiller(2011), GNP is calculated by adding the net income earned by the
nationals of a given country to its GDP while subtracting any incomes earned by any non-
citizens in the boarders of that country.
National Income(NI) and Net Domestic Production (NDP)
According to Miller (2012), national income is the total payments to factors of production
that are made in an economy. Therefore, national income measures income that is earned by all
the factors of production in a given economy. To arrive at the figure of national income, the NI
accountants must subtract business taxes, transfer payments from the Net Domestic product and
other business income adjustments since they do not add to the income of the nation. Afterwards,
the accountants need to add the net income earned abroad by the nationals of the country in
question to the Net Domestic Product.
National Income (NI) and Gross National Product (GNP)
Examining the table shows that the Gross National product was overly higher than the
National Income. The GNP was higher than the NI by $3043.6 billion, $3255.2 billion, $ 3239.4
billion in the first, second and third quarter respectively. For one to arrive at the NI from the
GDP, they have to subtract depreciation and statistical discrepancy from the GNP. According to
Mankiw (2015), the two measures are identical safe the statistical discrepancy.

APPROACHES TO CALCULATING GDP 9
Category comprising most of National Income
Employee compensation covers the largest proportion of national income computation
categories. It includes the payment in form of wages and salaries to the employees during the
given quarter or year.
Significance of the data here above and Reflection
Gross National Product, when compared to GDP, is a better measure of national income
because it includes all incomes earned by nationals and excludes foreigners’ earnings from
calculation of national income. However, Drudy (2009) reckons that both have received massive
criticism for their inadequacies. Despite that, he notes that GNP unmasks the repatriation of
property that is never revealed by GDP. It is critical that some countries such as Ireland have
experienced massive repatriation of earnings hence reducing their GNP considerably. An
improved version of GNP- the gross national income (GNI) has however proven more accurate
than the preceding two.
Owing to its availability, GNI has consistently used by World Bank and other
organizations to rank countries on the basis of income. Gomez, Perdiguero & Sanz (2019), note
the classification World Bank uses to put in various countries in groups such as Low, both lower
and upper middle, and High income countries. However, it is noteworthy that the GNI does not
summarize the development statistics that are important indicators to policy makers.

APPROACHES TO CALCULATING GDP 10
Personal income according to Dwivedi (2010) comprises of all incomes earned by
individuals from all sources in an economy. However, Dwivedi notes that an aggregation of
personal income does not necessarily equate to net national product(NNP) that it should. Instead,
the discrepancy is blamed on failure of the NNP to include some items such as transfer
payments; payments related to age, social security benefits among others.
Throughout the calculation of national income using the income approach, it is learnt that
all factor earnings by individuals in an economy are summed to give an overall figure. Secondly,
adjustments of depreciation are added onto the outcome to find the GDP. Further, employee
compensation was found to be the largest component of national income when it is computed
using the income approach. Finally, both GDP and GNP have been questioned before for their
inaccuracies in providing the true figure of national income leading to World Bank opting for
GNI in classification of countries for lending purposes.
Part 3: GDP in Different Countries
Time Time
Code
Country
Name
Country
Code
GDP (current US$)
[NY.GDP.MKTP.CD]
Population, total
[SP.POP.TOTL]
GDP Per
capita
2017 YR2017 Australia AUS 1323421072479.07 24598933 53799
2017 YR2017 Armenia ARM 11536590635.8267 2930450 3936
2017 YR2017 China CHN 12237700479375 1386395000 8826
2017 YR2017 Japan JPN 4872136945507.59 126785797 38428
2017 YR2017 Kenya KEN 79263075749.2682 49699862 1594
2017 YR2017 Portugal PRT 217571083045.99 10293718 21136
2017 YR2017 United
States
USA 19390604000000 325719178 59531

APPROACHES TO CALCULATING GDP 11
2017 YR2017 Nigeria NGA 375745486520.656 190886311 1968
Data from database: World Development Indicators
Last Updated: 03/21/2019
Source: World Bank
Rank by GDP per capita
From table 3.1 above, countries with the highest GDP when compared with the rest of the 8
countries whose data was compared can be presented as follows:
The order with GDP and GDP per capita as basis for comparison
World Bank, World Development Indicators (2017)
As observed from the above tables the rank depending on GDP and GDP per capita is not
the same except for the United States. The ranks occupied by countries based on GDP change
when GDP per capita is used since the concerned countries have different populations. China for
example showed a high GDP ranking second but due it is large population it ranked lower (5th)
Rank Country GDP per capita
1 United
States
59531
2 Australia 53799
3 Japan 38428
4 Portugal 21136
5 China 8826
6 Armenia 3936
7 Nigeria 1968
8 Kenya 1594
Rank Country GDP
1. United
States 19390604000000
2. China 2237700479375
1. Japan 4872136945507.59
2. Australia 1323421072479.07
3. Nigeria 375745486520.656
4. Portugal 217571083045.99
5. Kenya 79263075749.2682
6. Armenia 1323421072479.07

APPROACHES TO CALCULATING GDP 12
when GDP per capita was used. Similarly, Nigeria ranked 5th in terms of GDP but fell to 7th when
ranked based on GDP per capita. Conversely, Armenia that has a population that is almost half of
Kenya’s, dwarfed Kenya’s GDP per capita since its population was lower. Therefore, country
A’s GDP per capita will be higher than that of country B if it has a lower proportion of
population to GDP compared to that of country B.
Significance of data and Reflection
For every economy, it is important to calculate the GDP, GDP per capita and other
related statistics. The information is necessary for making economic plans. Further, it can be
used to measure the economic performance of the economy using output, expenditure and
income. Once the performance is measured, it can be compared across periods and various
countries (Romer, 2012). Finally, investors and entrepreneurs may need this information when
preparing to make investment decisions.
Countries with lower GDP to population ratio are likely to have a higher GDP than their
counterparts with a higher ratio. Thus, a country may have a higher GDP than another yet it may
have a lower GDP per capita when compared with the same country. Consequently, countries
seeking to develop must curb the rates at which their populations grow to prevent it from
outgrowing their national output. In case they do not manage that, they risk experiencing
negative growth. Nevertheless, developed countries may have a rapid population while still
recording impressive percentages of growth in output.
It was further learnt that, for the GDPs of various countries to be compared, they must be
first expressed in a common currency. GDP is measured in terms of the local currencies and to
guarantee measurement, the figures presented in the tables under study were first converted into

APPROACHES TO CALCULATING GDP 13
US dollars. Additionally, the exchange rates of the countries concerned are also considered in
facilitating the comparison. That is why the figures here above presented consider the purchasing
power parity.
Finally, GDP per capita seems a better measure of the living standards of people across
various countries than GDP because it considers an individual instead of the collective
population. Per capita income suffers the same limitations as GDP because it does not show who
is in a particular standard of living since it is a generalized figure. If fails to show the regional
variation of income. Moreover, it neglects the value of non-marketed output as does the GDP.
Such among other limitations are behind the criticism of per capita income as a good indicator of
the standard of living.
Part 4: Index of Economic Freedom
Country Overal
l Rank
Overall Score Busines
s
Freedo
m
Trade
Freedo
m
Financia
l
Freedo
m
Propert
y
Rights
Australi
a
5 72.0 88.3 87.6 90 79.1
Armeni
a
47 67.7 78.3 80.8 70 57.2
China 100 58.4 56.2 73 20 49.1
Japan 30 72.1 80.5 80 60 84.1
Kenya 130 55.1 55.8 60.4 50 53.8
Portugal 62 65.3 79.8 86 60 71.5
United
States
12 76.8 83.8 86.6 80 79.5
Nigeria 111 57.3 51.2 62.4 40 36.5
Source: Heritage Foundation (2019)

APPROACHES TO CALCULATING GDP 14
Economic freedom Ranks of target countries
Among the countries whose data was extracted, Australia was the highest ranked on 5th
position worldwide. Australia scores a total of 72 points. It is followed by the United States
which ranks 12th worldwide racking a score of 76.8. Third on this list is Japan ranked 30th with a
score of 72.1 globally, followed at close range by Armenia that ranks 47th (scoring 67.7) in the
world. Portugal is 62nd worldwide on the economic freedom ranks and fifth on this list having
scored 65.3. China is sixth on the selected countries’, list featuring 100th globally (58.4) eleven
places ahead of its closest challenger, among the selected countries, Nigeria (57.3). Kenya
closes the list at 130th position on the globe with a score of 55.1.
Economic freedom vs GDP per capita of the case countries
Countries with higher scores of economic freedom recorded higher values of GDP. From
the foregoing analysis it is evident that countries such as the USA and Australia that have high
economic freedom also happen to have a large share of GDP per capita when compared to those
that have lower economic freedom such as Nigeria and Kenya. Gwartney, Lawson, Hall &
Murphy (2018), show that countries with greater degrees of economic freedom have exhibited
higher incomes. That trend is exhibited in the above data.
Significance and Reflection
It is essential to appreciate that the concept of economic freedom is important as far as studies
on development of economies are concerned. Citizens of more economically freer countries
enjoy better access to education, higher gross domestic incomes per individual and they benefit

APPROACHES TO CALCULATING GDP 15
from better trade prosperity than those in their less free counterparts (Krieger & Meierrieks,
2016). The countries that show economic progress and strong economies have always been those
that have great economic freedom.
Miller, Holmes& Feulner (2010), proffer that economic freedom is the antidote to
poverty. That view is practical since economic freedom facilitates lowering of rates of
unemployment (Saunoris &Sajny, 2017). It has also promoted increased earnings among
workers, better standards of living and greater life expectancies in the world over. With greater
economic freedom, individuals can operate businesses with minimal government interference
and substantial confidence in protection of their property rights.
An economically free nation is a nation ready to prosper. It can be observed that
democracy, respect to property rights and its protection thereof, the autonomy accorded to
entrepreneurs and financial freedom stimulate growth. Şenalp (2018) documents ways in which
economic freedom enhances foreign direct investment inflows. New technologies find it easy to
penetrate and grow in economically free countries than those in tight freedom conditions.
Summarily, the great significance attached to economic freedom should be continued.
Students at college should learn more about this concept if future economic policy makers are to
be sharp and useful to the economy then.

APPROACHES TO CALCULATING GDP 16
References
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APPROACHES TO CALCULATING GDP 17
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APPROACHES TO CALCULATING GDP 18