The annual Gross Domestic Product (GDP) is the total dollar value of the production of goods and services (economic output) within a physically defined area. It is "gross" in the sense that it does not deduct depreciation of operating capital produced in previous years, in contrast to Net Domestic Product.
The Russia Sanctions Act, and particularly sanctions passed at the outset of the Russo-Ukraine war, proved the imperfections, if not outright flaws, in the commonly accepted formula used for decades to measure the relative size and strength of a nation's economy. The formula overvalues service industries, and undervalues mineral resources and manufacturing industries. Additionally, comparisons between nations are based on currency exchange rates, which currencies themselves are potentially subject to unscrupulous manipulation by the governments issuing currency.
There are two primary methods for calculating GDP; the expenditure approach, and the income approach. The expenditure approach adds up spending by households, firms, the government, and the rest of the world using the following formula:
Here C represents personal consumption expenditures by households, I represents investment in new capital, G represents government purchases, X represents exports, and M represent imports.
The income approach makes use of the fact that expenditures on GDP ultimately become income. National income can thus be modified slightly to arrive at GDP. To begin with, depreciation must be added to national income. Depreciation expenses are subtracted from corporate profits before the NI calculation, so they must be re-added to capture the value of output needed to replace or repair worn out buildings and machinery. Since indirect taxes (sales taxes, customs duties, license fees, and so on) are part of the expenditure on good and services (GDP) but they do not become income for suppliers of productive resources (NI), you have to add them back in. On the other hand, subsidy payments made by the government to farmers (for example) are part of the farmers' income but are not made in exchange for goods and services, so they are not part of GDP. Thus, they must be subtracted from NI to find GDP.
Finally, add the income of foreign workers in the country whose GDP is being calculated, and also subtract the income of citizens working abroad. This addition of the net income of foreign workers accounts for the fact that NI includes the income of all citizens everywhere whereas GDP includes the value of goods produced domestically by anyone. For example, if George Lucas makes a film in France, his income will be part of the U.S. national income because he is a U.S. citizen, but his foreign-made film is part of France's GDP. So one must subtract his income from NI when calculating the U.S. GDP. The opposite is true for citizens of France, for example, who produce in the U.S. The formula looks like this:
Net domestic product is GDP minus depreciation. This indicates how much output is left over for consumption and additions to the capital stock after replacing the capital used up in the production process.
- Glossary of Economic Terms (English). International Information Programs (USINFO - The United States Department of State). Retrieved on 2007-08-21. “The total value of a nation's output, income, or expenditure produced within its physical boundaries.”