Gross Domestic Product

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This article is about Gross Domestic Product. For the article on the company with ticker GDP, see Goodrich Petroleum (GDP). For articles about country GDPs see GDP (Disambiguation)

A country's Gross Domestic Product is the total value of the goods and services it produces in one year. GDP is used as a measurement of the size of a country's economy, and GDP growth is used as a measurement of economic growth - for example, in the US, two consecutive quarters of negative GDP growth is the official definition of a recession.

GDP = C + I + G + NX,

Where:

  • C = Consumer Spending
  • I = Business Expenses and Spending
  • G = Government Spending
  • NX = Net Exports

Components of GDP:-

  1. C (Consumption): It is the Private Consumption in the economy. This includes most personal expenditures of households such as food, rent, medical expenses and so on but does not include new housing.
  2. I (Investment Spending):- These are investments by business or households in capital. Examples of investment by a business include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment. In contrast to its colloquial meaning, 'Investment' in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. The distinction is (in theory) clear: if money is converted into goods or services, it is investment; but, if you buy a bond or a share of stock, this transfer payment is excluded from the GDP sum. That is because the stocks and bonds affect the financial capital which in turn affects the production and sales which in turn affects the investments. So stocks and bonds indirectly affect the GDP. Although such purchases would be called investments in normal speech, from the total-economy point of view, this is simply swapping of deeds, and not part of real production or the GDP formula.
  3. G (Government Spending):- This is the sum of government expenditures on final goods and services. It includes salaries of government employees, defense expenditure like purchase of weapons and any investment expenditure by the government. It does not include any transfer payments, such as social security or unemployment benefits.
  4. NX (Net Exports):- This is actually bifurcated into Gross Exports (X) and Gross Imports (M). Gross Exports - GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.

Gross Imports - Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.

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