How Is GDP Calculated? Formula and Example

GDP is calculated by adding the value of final goods and services produced within a country during a given period. The most common way to show the calculation is the expenditure method:

$$GDP=C+I+G+(X-M)$$

Here, $C$ is consumer spending, $I$ is investment, $G$ is government spending on goods and services, $X$ is exports and $M$ is imports. Imports are subtracted because spending on them is not spending on domestic production.

Worked example

Suppose, in billions of currency units, $C=500$, $I=120$, $G=180$, $X=90$ and $M=110$. Then:

$$GDP=500+120+180+(90-110)=780$$

GDP is therefore $780$ billion currency units for that period.

What is being counted?

Gross domestic product (GDP) measures production within a country, regardless of who owns the firms producing it. “Gross” means the figure is measured before deducting depreciation, which is the loss of value of capital goods through use or ageing.

GDP can also be calculated from the value of output produced or the incomes earned from producing it. In principle, the output, income and expenditure methods give the same total, although published figures may differ because of measurement difficulties. When using the output method, count value added at each stage, not every sale in full: adding the price of flour to the full price of bread would count the flour twice. To move from GDP at basic prices to GDP at market prices, add taxes on products and subtract subsidies on products.

For Cambridge International AS Level Economics, this answer focuses on the GDP part of National income statistics (4.1.2), with the basic-to-market-price adjustment (4.1.3) and gross-to-net distinction (4.1.4). Exam mistake: do not include government transfer payments, such as benefits, in $G$; they are not payments for current production.