12. Gdp as an indicator of economic results of the macroeconomic system.

Gross domestic product or GDP measures the total value of all final goods and services produced in the economy during a given year. It does not include the value of intermediate goods.

GDP can be determined in three ways, all of which should, in principle, give the same result. They are the product (or output) approach, the income approach, and the expenditure approach.

The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors ("producers," colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes.

Production approach

The production approach is also called as Net Product or Value added method. This method consists of three stages:

1 Estimating the Gross Value of domestic Output in various economic activities;

2 Determining the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services;

3 Deducting intermediate consumption from Gross Value to obtain the Net Value of Domestic Output.

Symbolically,

Gross Value Added = Value of output – Value of Intermediate Consumption.

Value of Output = Value of the total sales of goods and services + Value of changes in the inventories.

The sum of Gross Value Added in various economic activities is known as GDP at factor cost.

GDP at factor cost plus indirect taxes less subsidies on products is GDP at Producer Price.

For measuring gross output of domestic product, economic activities (i.e. industries) are classified into various sectors. After classifying economic activities, the gross output of each sector is calculated by any of the following two method

1 By multiplying the output of each sector by their respective market price and adding them together;

2 By collecting data on gross sales and inventories from the records of companies and adding them together;

Subtracting each sector's intermediate consumption from gross output, we get sectoral Gross Value Added (GVA) at factor cost. We, then add gross value of all sectors to get GDP at factor cost'. Adding indirect tax less subsidies in GDP at factor cost, we get GDP at Producer Prices.

Income approach

Another way of measuring GDP is to measure total income. If GDP is calculated this way it is sometimes called Gross Domestic Income (GDI), or GDP(I). GDI should provide the same amount as the expenditure method described below. (By definition, GDI = GDP. In practice, however, measurement errors will make the two figures slightly off when reported by national statistical agencies.)

This method measures GDP by adding incomes that firms pay households for factors of production they hire- wages for labour, interest for capital, rent for land and profits for entrepreneurship.

The US "National Income and Expenditure Accounts" divide incomes into five categories:

Wages, salaries, and supplementary labour income;

Corporate profits; Interest and miscellaneous investment income; Farmers’ income; Income from non-farm unincorporated businesses;

These five income components sum to net domestic income at factor cost.

Two adjustments must be made to get GDP:

1 Indirect taxes minus subsidies are added to get from factor cost to market prices.

2 Depreciation (or Capital Consumption Allowance) is added to get from net domestic product to gross domestic product.

A common formula for GDP is:

GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less subsidies on production and imports.

GDP = COE + GOS + GMI + TP & M – SP & M

Compensation of employees (COE) measures the total remuneration to employees for work done. It includes wages and salaries, as well as employer contributions to social security and other such programs.

Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses. Often called profits, although only a subset of total costs are subtracted from gross output to calculate GOS.

Gross mixed income (GMI) is the same measure as GOS, but for unincorporated businesses. This often includes most small businesses.

The sum of COE, GOS and GMI is called total factor income; it is the income of all of the factors of production in society. It measures the value of GDP at factor (basic) prices. The difference between basic prices and final prices (those used in the expenditure calculation) is the total taxes and subsidies that the government has levied or paid on that production. So adding taxes less subsidies on production and imports converts GDP at factor cost to GDP(I).

Expenditure approach

GDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M).

Y = C + I + G + (X − M)

Here is a description of each GDP component:

- C (consumption) is normally the largest GDP component in the economy, consisting of private (household final consumption expenditure) in the economy. These personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses but does not include the purchase of new housing.

- I (investment) includes, for instance, business investment in equipment, but does not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment. In contrast to its colloquial meaning, 'Investment' in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products.

- G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits.

- X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.

- M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.

Note that C, G, and I are expenditures on final goods and services; expenditures on intermediate goods and services do not count. (Intermediate goods and services are those used by businesses to produce other goods and services within the accounting year.

Real GDP is the total value of the final goods and services produced in the economy during a given year, calculated using the prices of a selected base year.

Nominal GDP is the value of all final goods and services produced in the economy during a given year, calculated using the prices current in the year in which the output is produced.

Except in the base year, real GDP is not the same as nominal GDP, output valued at current prices.

• Chained dollars is the method of calculating changes in real GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using a late base year.

• GDP per capita is a measure of average GDP per person, but is not by itself an appropriate policy goal.