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Hello everyone! If you’d like to understand how GDP is calculated, you’ve come to the right place! First of all, as you may know, GDP stands for gross domestic product. 

  • GDP represents the value of all final goods and services produced within a country’s borders in a given year. 

Economists have devised two different ways to calculate the GDP of a country, which is listed below:

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Income Approach: 

  • GDP = W + I + R + P + IBT + CCA. 
  • In words, GDP = wages + interest income + rent + profits + indirect business taxes + capital consumption allowance. 

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  • Wage: The number of money people earned from their jobs
  • Interest Income: Money earned from bank deposits
  • Rent: Money earned from renting properties
  • Profits: (Revenue - cost). The amount of money made by a business
  • Indirect business taxes: Taxes to the government
  • Capital Consumption Allowance: The cost of depreciation of capital

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Expenditure Approach (More important for AP Macro):

  • GDP=C + I + G + Xn. 
  • In words, GDP = Consumption + Investment + Government spending + Net Exports

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  • Consumption: Money spent on the purchase of goods and services by consumers
  • Investment: The money invested in capital goods/new buildings
  • Government Spending: The amount of government spending in the economy
  • Net exports - a country's balance of trade, (exports - imports). When positive, a country is exporting more than it imports, and vice versa

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Well, that’s it for this article! Good luck on your AP Macroeconomics exam!

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