The most critical and important factor that is used to calculate the performance of a particular economy is Income. Therefore it can be concluded that in order to measure economic performance and efficiency of economic activities of a country, measurement of GDP (Gross Domestic Product) is the most important economic indicator. Gross Domestic Product (GDP) represents the final monetary value of all products (either goods or services) that are legally produced within the particular country in a specific given time period.
While calculating the GDP one has to be very careful as it may encounter double accounting errors. As mentioned earlier that GDP encounters final value of all services and goods, therefore the distinction between final goods from supplementary intermediate goods is very critical. Same commodity in some instances would be counted as final product and therefore would be included in the calculation of GDP, whereas, in other instances the same product would be ranked as intermediate product, hence would not be included in the calculation of GDP. For example, monetary value of an orange sold to an orange juice producer would not be included in the calculation of GDP, but if an orange is consumed as final product its monetary value will be included in the calculation of GDP.
Gross Domestic Product of an economy can be calculated through two different approaches called expenditure approach and Income approach. The most commonly used approach for the calculation of GDP is expenditure approach. This approach incorporates the addition of money expended all goods and services that are consumed in a period of one year. This approach is further divided into four components, that collectively construct GDP of the economy based on expenditure approach, these four components are; Personal consumption, Investment made domestically, expenditures by government and net exports.
Though the income approach to the calculation of GDP is not as common as the expenditure approach but still it is widely used. This approach relies on the income of the people generated through legal economic activities. Salary and wages paid to the workers constitute the major portion of income based approach. Other components of this approach include corporate profits, interest earnings, depreciation, taxes and the income generated through self employed activities.
Beside these two approaches there are two other categories of GDP, Real GDP and Nominal GDP. Real GDP represents a comprehensive detailed view of the economic position, whereas the nominal GDP encounters adjustment with regard to the increasing or decreasing inflation rate. While analyzing economic performance, the economists do not only rely on the absolute value of GDP but they also focus on the growth trend in GDP. The growth rate can better elaborate the position of an economy with comparison to previous years.