Understanding GDP: How to Calculate and its Impact

GDP, or Gross Domestic Product, stands as a pivotal measure to assess a nation's economic growth rate. But what exactly is GDP, how is it calculated, and what factors influence it? Let's delve into this index in today's discourse!

Deciphering GDP

In economic terms, GDP represents the market value of all final goods and services within a territory during a specific period.

It serves as a fundamental gauge to evaluate the economic growth of a nation, revealing fluctuations in market prices of particular goods/services over a defined timeframe (quarterly or annually).

A decrease in this index implies a negative impact on the economy, currency depreciation, inflation, and an increase in unemployment rates. Additionally, GDP also indicates relative income levels and the quality of life of citizens within a territorial scope.

However, a single index only represents a few functions rather than encompassing the entire economy. Therefore, when assessing economic growth, it is necessary to consider many other indices.

Categorizing GDP

What is GDP and how many types of GDP are there? Based on various criteria, gross domestic product is classified into several types, such as per capita GDP, nominal, real, and green GDP. Each type has its own characteristics, reflecting a certain aspect of the economy.

Per Capita GDP

This index is calculated by dividing the total domestic product of a country by the total population (at a certain point in time). This is an index reflecting the income and quality of life of the population.

Nominal GDP

The total domestic product of final goods/services calculated at current prices is referred to as nominal GDP. This means that the products produced in a period are valued at the prices of that period.

This index reflects the rate of price increase/decrease in an economy and includes changes in prices due to inflation.

Real GDP

What is Real GDP? Real Gross Domestic Product is understood as the total national output adjusted for inflation. This index is calculated by subtracting the inflation index (CPI) from potential GDP within the same research period.

Green GDP

This is the remaining part of GDP after deducting a portion necessary for environmental recovery due to the consequences of production processes. This includes costs deducted for waste treatment from production and consumption activities, land use costs, costs related to pollution and waste investigation, etc.

Common Methods of Calculating GDP

After understanding what GDP is, many people are also interested in how GDP is calculated. This index is calculated using various methods depending on the evaluation objectives. Specifically, there are 3 common calculation methods: the expenditure approach, the income approach, and the value-added approach.

Expenditure Approach

In this approach, GDP is the total amount that households spend on buying final goods and services annually. Specifically:

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

Where:

• C (Consumption): includes household expenditures on goods and services.
• I (Investment): includes business expenditures on equipment, construction, factories, etc., and household expenditures on house construction and purchase. Note, if a business's inventory has not been sold, it is still counted in GDP.
• G (Government Purchases): includes government expenditures at all levels of government in defense, infrastructure, education, law, health, transportation, etc.
• X - M (Net Exports): net exports = export value - import value.

Income Method

According to this method, GDP equals the total income of factors such as wages, profits, rent, interest, etc. This is also the total cost of producing final products, so the income method is also called the cost method.

GDP = W + R + i + Pr + Ti + De

Where:

• W (wage) = wage income
• R (Rent) = income from renting various assets
• i (Interest) = interest income
• Pr (Profit) = profit
• Ti = net indirect taxes
• De (Depreciation) = asset depreciation

Value Added Method

Calculating gross domestic product using the value added method is slightly more complex. You need to know two important indices: enterprise value added (VA) and industry value added (GO).

Where:

• VA = market value of output - input value (only counting the parts transferred to the product value).
• GO = ∑ VAi (i=1,2,3,..,n), which is the total value added of enterprises in the industry.

GDP = ∑ GOj (j=1,2,3,..,m)

Where:

• GOj = value added of sector j and m = number of sectors in the national economy.

Factors Influencing GDP

What are the main factors influencing GDP? The GDP index is influenced by many factors, among which are 3 main factors: population, FDI (Foreign Direct Investment), and inflation. So how do these 3 factors affect the gross domestic product of each country?

Population: This is the primary workforce in society, responsible for producing material wealth and also the final consumption. Therefore, population and gross domestic product have a close relationship.

FDI (Foreign Direct Investment): includes capital investment from individuals, foreign enterprises to build infrastructure and produce goods, services.

Inflation: This is also a factor affecting the real GDP index. If the CPI index is too high, the prices of goods and services will continuously increase over a long period, leading to currency depreciation.

What Will Vietnam's GDP Scale Be Like in 2023?

According to experts from VNDIRECT Research, Vietnam's GDP is forecasted to grow by 5.6% compared to the same period in Q1/2023.

In which, the service sector is forecasted to grow by 7.9% compared to the same period, higher than the growth rate of 4.6% in Q1/2022. This is because China has allowed the resumption of international group tours in Vietnam since March 15, 2023. This may help increase international tourist arrivals and recover the GDP of the tourism sector.

Conversely, the manufacturing sector is forecasted to grow by only 3.7% in Q1/2023, lower than Q4/2022 (4.2%), due to negative impacts from the global economic downturn. Also in this context, the value of imported raw materials for production decreases, so the forecast for the export sector is only a 5% growth compared to the same period in Q1/2023.

Finally, according to experts at VNDIRECT Research, the agriculture and aquaculture sector is expected to grow by about 3.1% in Q1 compared to the same period.

In summary, this article helps you understand what GDP is and the related aspects of this index. Follow other articles by Mytour and leave comments below the article if you have any questions.