What Is GDP?: Services

Real GDP
For example, if an economy's prices have increased by 1% since the base

year, the deflating number is 1.01. If nominal GDP was $1 million, then real
GDP is calculated as $1,000,000 / 1.01, or $990,099.
Potential gdp
What Is GDP?
Gross Domestic Product measures the total output of all the goods
and services in an economy as measured by the price of those
products. Typically GDP is expressed in U.S. dollars, the world's
standard reserve currency, however, economists can measure GDP
in any currency they choose.
For example, take a sample economy with the following outputs:
 A bakery which sells loaves of bread for $10 a loaf and bakes 20
loaves a year;
 A law firm which bills at $50 an hour and does 100 hours of
business a year;
 A carpenter who sells chairs for $25 a chair and builds 10 chairs per
year;
 A school that employs two teachers for $1,000 a year (the price per
year of education).
If we assume that this represents the total of all work and production
in our make-believe economy, it has the following GDP:
• ($10 x 20) + ($50 x 100) + ($25 x 10) + ($1,000 x 2) = $7,450
The total amount of goods, services and work produced by this

economy, otherwise known as its size, is $7,450.
Services
Gross domestic product also includes services and government-
produced value. Service outputs are businesses that charge for time
or labor rather than a per-unit product, such as lawyers, doctors,
plumbers, electricians. The GDP typically (although not always)
measures them based on revenue.
It also measures many forms of government work such as teaching
or military services. This is typically calculated based on the salaries
paid to those service providers given that they create value
(protection and education create real, tangible benefits to consumers,
for example) but don't directly charge consumers for that product.
(Citizens pay for government services through taxes, but since not all
tax dollars create value, it would be inaccurate to include the
government's tax base in the GDP.)
Finished Products
Note that gross domestic product only measures final products sold
to consumers. It does not include components or intermediate
products. For example, in our study above, GDP would not measure
the value of the lumber sold to the carpenter.
This is to avoid double-counting the same product.
What Is Real GDP?

Real GDP is a measure of gross domestic product that adjusts for
inflation and deflation. This is as opposed to nominal GDP which
measures gross domestic product based on unadjusted prices.
Inflation/Deflation
Inflation and deflation are the processes of prices changing on the
same product from year to year either up or down respectively. For
example, take a loaf of bread that costs $10 in 2019. If that same loaf
of bread costs $11 in 2020 it has experienced inflation of 10%. If that
bread, on the other hand, costs $9 in 2020 it has experienced
deflation of 10%.
Deflation happens rarely in modern economies. Most experience

annual rates of inflation, as prices go up due to increased access to
cash and purchasing power by consumers.
Real GDP vs. Nominal GDP

Real GDP generally measures an economy's actual value more
accurately than nominal GDP.
Nominal GDP measures the total output of an economy based only
on prices. This means that the metric will increase both with
economic output and also price inflation. For example, consider the
bakery in our sample economy above. Under a measure of nominal
GDP we might have two situations:
 The bakery produces 20 loaves of bread in 2019 then 22 loaves of

bread in 2020. It charges $10 a loaf both years.
 OR the bakery charges $10 a loaf in 2019 then $11 for the same loaf
in 2020. It produces 20 loaves of bread both years.
In both cases nominal GDP would grow by 10% (from $200 per year
to $220). However in the second case that growth would be illusory.
It wouldn't represent an economy generating more goods and
services, just an economy charging more for the same ones.
By accounting for inflation or deflation, real GDP will only grow when
an economy actually produces more and/or more valuable outputs. In
our case above, for example, real GDP would show growth in the first
situation but not in the second.
Using Nominal GDP

While real GDP measures an economy more accurately, economists
use nominal GDP to measure an economy against factors that don't
change with inflation. The most common example of this is debt.
National debt has an interest rate but it doesn't necessarily change
with inflation. As a result, economists usually measure a
nation's debt-to-GDP ratio based on nominal GDP.
How to Calculate Real GDP

Real GDP is calculated by the following formula: Real GDP =
Nominal GDP / Deflator.
The deflator is a figure produced based on the rate of inflation. For

example, say the national rate of inflation was 2% in a given year
(indicating that the same goods and services cost an average of 2%
more than they did the year before). In this case, the deflator will be
1.02.
For example, say an economy has a nominal GDP of $100 million,
the raw total of all goods and services as measured by their prices.
Assume also that the economy has experienced 2% inflation over the
course of the year. We would calculate real GDP as:
 100 million / 1.02 = 98.03 million

After accounting for inflation, the economy actually produced
approximately $98 million worth of goods and services.
ECONOMICS MACROECONOMICS
Net Domestic Product (NDP)

By AKHILESH GANTI
Reviewed By ERIC ESTEVEZ
Updated Jan 25, 2021
What Is Net Domestic Product (NDP)?
Net domestic product (NDP) is an annual measure of the economic output of a nation
that is calculated by subtracting depreciation from gross domestic product (GDP).
KEY TAKEAWAYS
 Net domestic product (NDP) is an annual measure of the economic output of a nation that is
adjusted to account for depreciation.
 It is calculated by subtracting depreciation from the gross domestic product (GDP).
 NDP, along with GDP, gross national income (GNI), disposable income, and personal income,
is one of the key gauges of economic growth that is reported on a quarterly basis by the
Bureau of Economic Analysis (BEA).
 An increase in NDP would indicate growing economic stagnation, while a decrease would
indicate ongoing economic health.
How Net Domestic Product (NDP) Works

NDP accounts for capital that has been consumed over the year in the form of
housing, vehicle, or machinery deterioration. The depreciation accounted for is often
referred to as capital consumption allowance and represents the amount needed to
replace those depreciated assets.
NDP = GDP - DepreciationNDP=GDP−Depreciation

The frequency and scope of such replacements can vary by type of capital assets.
Machinery that is put to regular use may need parts replaced regularly until the entire
piece of equipment is no longer usable. While that may take many years, barring
unexpected damage or defects, there is a cycle of equipment failure and replacement.
Part of the machinery in a factory’s production line may need to be replaced while
another set of similar machines continues to function within the same factory. The
acquisition of the replacement machinery would be factored into the depreciation
aspect of the NPI.
This differs from an expansion of factory operations—for example, the opening of a

new site, adding to the total number of factories. The acquisition of new machines for
the new factory would represent a gain because the demand was driven by the need to
increase the scope of the operations, rather than serve as a replacement. This would
mean the purchased machine would qualify as a gain for the NDP.
The construction of new homes on previously unused real estate can also represent a

gain for the NDP if the residences are not intended to replace defunct or demolished
property. For example, in many urban areas, efforts may be made to re-purpose
underutilized real estate that has fallen into disrepair. Instead of expanding the sprawl
of the city, older buildings might be torn down and replaced by new construction
intended to fill the same use as the predecessor building. Such an example would
qualify as depreciation and replacement. By contrast, if a new housing community is
developed, the construction of residences would be contributory to NDP.

An increase in NDP signifies growing economic stagnation, while a decrease denotes
ongoing economic health.
Special Considerations
NDP, along with GDP, gross national income (GNI), disposable income, and personal
income, is one of the key gauges of economic growth that is reported on a quarterly
basis by the Bureau of Economic Analysis (BEA).
Though GDP is frequently cited when assessing the economic health of a country,
NDP puts into perspective the pace at which capital assets degrade and must be
replaced. This is important as failure to take action would result in a decrease in the
country's GDP.

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Real GDP

For example, if an economy's prices have increased by 1% since the base

For example, take a sample economy with the following outputs:

• ($10 x 20) + ($50 x 100) + ($25 x 10) + ($1,000 x 2) = $7,450

The total amount of goods, services and work produced by this

This is to avoid double-counting the same product.

What Is Real GDP?

Deflation happens rarely in modern economies. Most experience

Real GDP vs. Nominal GDP

 The bakery produces 20 loaves of bread in 2019 then 22 loaves of

Using Nominal GDP

How to Calculate Real GDP

The deflator is a figure produced based on the rate of inflation. For

 100 million / 1.02 = 98.03 million

Net Domestic Product (NDP)

How Net Domestic Product (NDP) Works

NDP = GDP - DepreciationNDP=GDP−Depreciation

This differs from an expansion of factory operations—for example, the opening of a

The construction of new homes on previously unused real estate can also represent a

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