Gross Domestic Product (GDP) is the total output of all economic activity in a country over a given period and a country’s GDP will include domestic output by foreign owned firms.
GDP has a mathematical relationship with the measures of gross national income (GNI) and net national income (NNI)
GNI is the sum of all incomes for residents of a country regardless of the location of the assets of these residents.
NNI = GNI less depreciation of physical capital
GDP + interest, dividend, rent and profit abroad = GNI
GNI – physical capital depreciation = NNI
Expenditure Approach to GDP
GDP can also be calculated using the expenditure approach.
GDP = Personal Consumption + Investment + Government Consumption + (Exports – Imports)
GDP = C + I + G + (X-M)
GDP at Factor Cost = Expenditure Approach GDP – Indirect Taxes + Subsidies
GDP does not include items such as: government transfer payments, gifts, unpaid household activities, trades, second hand transactions (e.g., selling used goods on Ebay), and transactions involving illegal goods.
Nominal GDP refers to GDP in current prices.
A price deflator must be applied to the current GDP in order to compare current GDP to the GDP of a prior year.