HOW IS GDP MEASURED?
GDP is measured by two different approaches.
However, both of these approaches obtain the same end result.
a) As a flow of expenses
(end products): that's to say, where have the different goods
and services gone during the fiscal year.
b) As a flow of income:
how the income is distributed which has been generated during
the production of the goods and services.
Why do both approaches coincide? We are going
to try and explain it:
All productive processes have an
end result (the elaboration of goods or services). However in
these processes there are certain things that a company has
(salaries, rent, capital interest rates, etc). The difference
between the value of what has been produced and the companies
expenses is the company's profit (which is the how the owner
of the company perceives it).
Therefore, if we add all of the costs
together (including the companies profit) they will be the same
as the production value.
Lets analyze the composition of the GDP according to the two
previous approahces:
a) As a flow of expenses
GDP = Consumption + Investment
+ Government Spending + Exports - Imports
Abbreviated form:
GDP = C + I + GS+ X
- M
Consumption: the goods
and services produced in the year that are acquired by families
and companies for their final consumption. For example: a book,
a chocolate bar, a washing machine, a car, the cost of a lawyer,
a hair cut, a car wash, etc.
Investment: the goods
acquired by companies to incorporate them in their productive
structures. For example, a computer, a machine, a ship, a tractor,
etc.
Just one consumer good can be destined
to consumption or investment, depending on its use: for example,
if a family acquires a car for its use you are talking about
a consumer good, but if a company acquires a car for its sales
team, then you are talking about an investment.
Government Spending:
the goods and services acquired by Public Administration, either
for their consumption (material for the office, cleaning and security
services...), or as an element of investment (computers, the construction
of motorways, hospitals...). Also included in this is the salary
of civil servants.
It does not include, however, the
expense of pensions: when they pay the salary of a civil servant
they buy a service, their work (there is an economic transation),
whilst when they pay a pension they are simply transferring
income (they don't receive anything in exchange), which therefore
does not contribute to the GDP.
Imports - Exports: the
difference between what a country exports abroad (goods and services)
and what it imports.
Exports
are like a positive sign (they increase the GDP) as they are
a product that has been elaborated in the country.
Whilst the imports are seen as a
negative sign: they don't decrease the GDP, they simply compensate
an amount entered in the books in consumption, investment or
public expense which as it has been created abroad doesn't have
to be included in the GDP.
Perhaps we can try and explain what we mean with an example:
If a Spaniard buys a Volvo (made
in Sweeden) this purchase is registered in the GDP as "consumption".
But as the car has not been made in Spain, it has been imported,
it shouldn't be part of the GDP, therefore it is noted as
an "import" (it is now taken off the consumption
part of the GDP).
b) As distribution of income
Another way to measure the GDP is by adding the income that
has been generated throughout the year deriving from economic
activities.
GDP is equal to the sum of:
Salaries (worker's income).
Interest rates and income
Indirect taxes: VAT....(income
that the state receives).
Depreciation or redeption
(income that a company receives as compensation of the debilitation
suffered by being inmobile).
Profits.