Beginners:GDP - Calculating GDP
This article is part of Statistics 4 beginners, a section in Statistics Explained where statistical indicators and concepts are explained in a simple way to make the world of statistics a bit easier for pupils and students as well as for everyone else with an interest in statistics.
What is the basis for the calculation of GDP?
GDP is a key measure within a wider framework of economic statistics which is often simply referred to as national accounts. The full name of the binding standards and methods used for compiling these accounts in the EU is the European system of national and regional accounts, referred to by its abbreviation ESA. The global standard from the United Nations (UN) is called the System of National Accounts (SNA). These standards are updated regularly to reflect changes in the economy, such as technological or financial developments. The latest version from the UN is from 2008 and is called SNA 2008 while the latest version from the EU is from 2010 and is called ESA 2010. A page on the Eurostat website focuses on ESA 2010 where more detailed information can be found.
GDP does not come from a single survey. In fact, national accounts are compiled by pulling together data from a vast range of sources including sample surveys of businesses and households as well as administrative data such as VAT declarations (value added tax - a tax on the value that has been added to products and services). More information on the data sources is provided in a separate article.
How is GDP calculated?
GDP can be calculated in different ways and the most common is the production approach, which we will concentrate on below.
The production approach
The production approach adds up the value added at basic prices of all industries, for example, agriculture, manufacturing, construction, retailing, banking, health services.
Value added is the value of goods or services that have been produced minus the value of the goods and services needed to produce them (see Box 1).
The basic price is the amount of money actually received and kept by the producer of the goods and services (see Box 2).
Box 1: Value added
The value added of production is not simply the value of goods and services that have been produced, but concerns how much extra value that has been created in their production.
In simple terms, it is the value of goods and services produced minus the value of materials and other goods and services that are consumed (known as intermediate consumption) in order to produce these goods or services.
Example: Leonie is a taxi driver and charges a customer EUR 10 for a trip and that is the value of her service. In order for Leonie to provide this service she must pay for petrol, car insurance and a number of smaller items which all together for this trip cost her EUR 3; this is her intermediate consumption.
Her value added for this trip is the production or service value minus the cost of the intermediate consumption: EUR 10 - EUR 3 = EUR 7.
Box 2: Basic prices
Buying and selling goods and services is valued at the actual price agreed upon by the seller and buyer, in other words the market price. However, in national accounts, other prices can be used depending upon how taxes (money that people or businesses have to pay the government) and subsidies (money paid by a government to help or encourage businesses) on products are recorded. The one we will concentrate on is the basic price.
The basic price is the amount of money actually received and kept by the producer. It excludes all taxes on products the producer receives from the buyer (VAT and other taxes on products which are passed on to the state) but includes any subsidies the producer receives from the state as an encouragement to lower the prices.
The value of the goods and services produced in the economy is expressed in basic prices. After deduction of intermediate consumption, one obtains the value added at basic prices.
To conclude: the production approach adds up the value added at basic prices. To this are added taxes on goods or services, while subsidies on goods or services are subtracted in order to calculate GDP at market prices.
As mentioned, GDP can be calculated in different ways, in fact there are three different methods: the above mentioned production approach, which is the most common, as well as two others which are called the "expenditure" and the "income" approach. The three approaches should all lead to the same result.
How often is GDP calculated?
In the EU, GDP is calculated for every year and is then called annual GDP, as well as for every quarter, called quarterly GDP. Some EU Member States calculate or plan to calculate monthly GDP.
Related articles in Statistics 4 beginners:
Related articles in Statistics Explained:
- All Statistics Explained articles on national accounts and GDP
- National accounts and GDP
- National accounts background
- National accounts — an overview
Glossary items in Statistics Explained:
- Gross domestic product (GDP)
- European Union (EU)
- National and regional accounts
- European system of national and regional accounts
- United Nations (UN)
- System of national accounts (SNA)
- Value added
- Research and development (R&D) intensity
- Intermediate consumption
- Basic prices
- Public debt
- Government deficit