GDP can be calculated by the following three methods:


Defined equivalently in 3 ways:

  • (1) uses the production function against the whole economy
  • (2) uses the Income method
  • (3) uses the Output method. Generally, .
    • Consumption is stable in recessions because you need to eat; Investment suffers
    • Government spending composes around in US, is EU
    • Note that and thus Net Exports can be negative.
📎 Observee (2) and (3) are same because the macroeconomic circular flow is a closed loop.
  • Historically, the LR trend of GDP has been growing exponentially since the industrial revolution…
    • …GDP per capita [←a better measure of well-being] is growing too…
    • …Consumption per capita [←an even better measure of well-being] is growing too!
    • This growth seems to be coming from growth in labor income, while capital income is stagnant.
  • Short-run fluctuations in GDP are due to the business cycle.
  • Some economic activity is not in GDP:
    • Informal market (big in some countries; e.g. 1/3 in Brazil)
    • Home production; i.e. homemaking

Calculation Methods

  1. Output [= production] method

  2. Expenditure method: is only for final sales, not for intermediate goods. Final sales are always to the household.

  3. Income method → Note that firms pass on their taxes to the consumer (HH), or corporate taxes are paid by entrepreneurs who are at the end of the day HHs.


  • GNI method if both incomes are pre-tax incomes
  • GNP method …where is the net domestic income (inflow - outflow)

Deflator & CPI

  1. Deflator is the reduction of nominal GDP in years after the base year due to inflation.

…thus the real gdp for year is calculated

  • Deflator is 100 in the base year
  • Deflator inflation rate
  1. CPI is another index to reduce the nominal GDP. Assume the current year is , base year

…thus the real gdp for year is calculated