Economic growth is measured in terms of an increase in the size of a nation's economy. A broad measure of an economy's size is its output. The most widely-used measure of economic output is the Gross Domestic Product (abbreviated GDP).
GDP generally is defined as the market value of the goods and services produced by a country. One way to calculate a nation's GDP is to sum all expenditures in the country. This method is known as the expenditure approach and is described below.
Alternative Approaches to Calculating GDP
There are three approaches to calculating GDP: * Expenditure approach - described above; calculates the final spending on goods and services. * Product approach - calculates the market value of goods and services produced. * Income approach - sums the income received by all producers in the country.

Expenditure Approach to Calculating GDP
The expenditure approach calculates GDP by summing the four possible types of expenditures as follows: GDP | = | Consumption | | + | Investment | | + | Government Purchases | | + | Net Exports |
Consumption is the largest component of the GDP. In the U.S., the largest and most stable component of consumption is services. Consumption is calculated by adding durable and non-durable goods and services expenditures. It is unaffected by the estimated value of imported goods.
Investment includes investment in fixed assets and increases in inventory.
Government purchases are equal to the government expenditures less government transfer payments (welfare, unemployment payouts, etc.)
Net exports are exports minus imports. Imports are subtracted since GDP is defined as the output of the domestic economy.

These three approaches are equivalent, with each rendering the same result.

Final Sales as a GDP Predictor
Note that an increase in inventory will increase the GDP but possibly result in a lower future GDP as the excess inventory is depleted. To eliminate this effect, the final sales can be calculated by subtracting the increase in inventory from GDP. The final sales can be either larger or smaller than GDP. The change in inventory is an important signal of the next period's GDP.

Nominal GDP and Real GDP
Without any adjustment, the GDP calculation is distorted by inflation. This unadjusted GDP is known as the nominal GDP. In practice, GDP is adjusted by dividing the nominal GDP by a price deflator to arrive at the real GDP.
In an inflationary environment, the nominal GDP is greater than the real GDP. If the price deflator is not known, an implicit price deflator can be calculated by dividing the nominal GDP by the real GDP:
Implicit Price Deflator = Nominal GDP / Real GDP
The composition of this deflator is different from that of the consumer price index in that the GDP deflator includes government goods, investment goods, and exports rather than the traditional consumer-oriented basket of goods.
GDP usually is reported each quarter on a seasonally adjusted annualized basis.

GDP Growth
Countries seek to increase their GDP in order to increase their standard of living. Note that growth in GDP does not result in increased purchasing power if the growth is due to inflation or population increase. For purchasing power, it is the real, per capita GDP that is important.
While investment is an important factor in a nation's GDP growth, even more important is greater respect for laws and contracts.

GDP versus GNP
GDP measures the output of goods and services within the borders of the country. Gross National Product (GNP) measures the output of a nation's factors of production, regardless of whether the factors are located within the country's borders. For example, the output of workers located in another country would be included in the workers' home country GNP but not in GDP. The Gross National Product can be either larger or smaller than the country's GDP depending on the number of its citizens working outside its borders and the number of other country's citizens working within its borders.
In the United States, the Gross National Product (GNP) was used until the early 1990's, when it was changed to GDP in order to be consistent with other nations.
Case Study
In recent times there has been a tremendous interest in the growth process of
China and India. Both the countries are being looked upon as ‘the so called’ global engines of growth. Their role as ‘global engines’ of growth is not so much based on their current performance, but more so for the potential to lead the future growth process in the world economy. China has started moving towards a pro-market economy since 1978 while India’s reforms have been started much later since 1991.
While China dismantled the Soviet style command economy, India broke away from the regime of mixed economy that had a strong role for central planning. While China has attained a high growth path by accelerating the rate of capital formation with a heavy emphasis on government investment in infrastructure, India instead reduced public investment and rather adopted policies to raise private investment during the reform process. In terms of achievement India has performed the best in the financial sector reforms. China had initially taken a different path by way of raising productivity in manufacturing, adopting a path of export led industrialisation and policies to attract more foreign direct investment, domestic and global factors have forced China to redirect the reform process 3for its financial sector since late 1990s.

growth in the real sector.
Starting from a rate of growth of 3.6% in the pre 1978 period, when reforms were initiated, China’s rate of growth has averaged a noticeable 9% for the last two decades. As a matter of fact the China’s average rate of growth of GDP for the period 1991 to 2004 is 10.14% and has never been less than 7.5% during the same period. This high rate of growth in China has been ascribed to a high rate of savings and capital formation. Prior to reforms in late 1970s rate The per capita GDP of the two countries also shows marked difference. Starting with a per capita GDP of 1486.48 in 1991 India’s per capita GDP has reached 2885.29 in 2004 while
Chinese per capita GDP has grown from 1720.85 in 1991 to 5418.87 in 2004 (all calculations at constant 2000 US $ adjusted for PPP). The rate of growth of per capita GDP is almost three times higher for China (9.10%) than India (3.91%).
This high rate of growth of GDP had often been ascribed to a very high rate of savings and capital formation (and fixed capital formation). As is evident from Table 1 the average domestic savings rate in China is 39.08% while that in India is 21.86%. The rates of gross capital formation and gross fixed capital formation in China and India are 36.73%, 33.67% and 22.93%,
22.34% respectively. The rates of growth of gross fixed capital formation are also higher in
China, viz. 14.31% than in India, viz. 7.04%.
During the same period general government consumption expenditure to GDP ratio is very similar in China and India – a little over 11% though the rate of growth is higher in China.
Household consumption expenditure has also grown at a higher rate in China (8.38%) than in
India (5.03%). In recent times a lot of emphasis is given to inflow of foreign direct investment
(FDI) as an engine of growth particularly in the developing and emerging market economies. As is evident from Table 1 while the average net FDI inflow to GDP ratio is higher for China
(3.88%) than India (0.60%), the rate of growth of FDI inflow is almost double for India (54.25%) than China (29.05%). Figs. 1 through 4 plot the growth rates of GDP (or per capita GDP) and some of the components of demand, in levels or in growth rates. Fig. 1 shows that rate of growth of GDP and per capita GDP are by and large higher for China for the period as a whole. But they have decelerated in the latter part of the period for China and show a tendency to stabilize around 1010%. The growth rates of GDP and per capita GDP for India exhibit cycles around 6% in more recent years. Fig. 2 shows that growth rate of GDP and growth of rate of gross fixed capital formation though move together as a whole, the fluctuation for the latter is much more while it is much more stable for the rate of GDP growth for the two countries. In fact it is often the case that growth rate of gross fixed capital formation decreases (increases)2 though the growth rate of
GDP shows a rising (falling) trend or even if falls, the extent of the fall is much less. It is more pronounced for China than India. Similar trend is also observed for growth of rate of gross capital formation. Fig. 3 plots rate of growth of GDP and the rate of general government consumption expenditure for both the countries. It is more stable for both the countries – the fluctuations are within a band of 10% to 13% p.a. and the averages very close than the rate of growth of GDP. It may also be noted that the rate of government consumption expenditure and growth of GDP move in opposite direction, particularly in the late 1990s. During post 2000 period the rate of government consumption expenditure for the two countries show a tendency to converge. The patterns of growth rates of general government consumption expenditure show more fluctuations for both the countries as shown in fig. 4. Starting from a high level of around 20% general government consumption expenditure for China has decreased over the years until 1996, then reversed itself showing a tendency to stabilise around a little less than 10%. India’s rate of growth of general government consumption expenditure shows much more fluctuations with no perceptible trend. However, in 2004 it is close to that of China. The rate of growth of household consumption expenditure for India though started with a rising trend until 1996 exhibits a higher degree of fluctuations in the later years. The corresponding growth rate for China, though