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What Are the Components of GDP?

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  • Written By: Peter Hann
  • Edited By: Angela B.
  • Last Modified Date: 27 June 2014
  • Copyright Protected:
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    Conjecture Corporation
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The value set for all goods created and services rendered during the course of a year within a nation is known as that country's gross domestic product. Though there are three ways of measuring GDP, all look at the same aspects of the economy and should all reach the same conclusion. These methods are known as the output method, the income method and the expenditure method. The data collected for calculating GDP under each method come from various components of GDP, so deficiencies in the underlying data may lead to slight differences in the results provided by each method. A first estimate of GDP normally is issued soon after the end of the relevant period, and the figure will be corrected as more data become available.

The output method attempts to calculate the value of all goods and services produced by companies operating within an economy. This looks at the production process and computes the value added at each stage of the process. These include the value added by the manufacturer, wholesaler and other links in the supply chain. The value of services performed in the economy also is calculated. This data generally would be presented in the form of total output for each of the main sectors of the economy, including the primary sector, such as agriculture and mining; the secondary sector, such as manufacturing; and the tertiary, or service, sector.

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In choosing which components of GDP to study, the income method calculates the total of all incomes earned in an economy. This should reach the same result as that reached by computing the value of goods and services in the economy. The income method looks at the same components of GDP from the point of view of the income earned rather than looking at the value added.

The expenditure method looks at what has been spent on all goods and services in an economy. This computes the spending on goods and services by each sector of the economy, such as consumption by households, investment by firms, and government spending. The expenditure method also includes spending by foreigners on the country’s exports and then subtracts the spending on imports by people inside the country.

The components of GDP are measured to arrive at an idea of how the economy is performing and to assess the success of government policies. The government may formulate revised policies on the basis of GDP statistics, and economists may use them to formulate new models of the economy. Comparisons between countries also may be made on the basis of the GDP figures. A limitation of the GDP computation is that it does not include the informal economy, which does not show up in the data. It also ignores factors such as quality of life.

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