What Exactly is the GDP (Gross Domestic Product)?

by Investing School on November 14, 2009

You do not have to look far to find news about GDP or Gross Domestic Product. Especially with this sagging economy, the term is tossed around a lot as a barometer against new jobs. Economists talk about this term regularly and its significance in our daily lives has more bearing than you might have first imagined.

A country’s economic growth and performance is measured, in part, by its GDP or Gross Domestic Product. It is also the market value of all the goods and services a country produces within its borders. There have been historically strong correlations between a strong GDP and a country’s standard of living.

A very broad method of measuring a nation’s GDP is to determine its output or the value of its goods and services produced within that country. One method of determining a country’s GDP is to calculate the sum of several types of expenditures. Consumption, investment, government purchases, net exports should be added to determine GDP.

Consumption is the largest aspect of the GDP. In the United States, services make up the most reliable and stable component of consumption. Investment includes business investment in many types; plant, equipment, inventory and structures. However, it does not include the exchange of current assets. Government purchases include everything from the salaries of public servants to the purchase of weaponry for the military. Net Exports are simply exports minus imports. The sum of all of these components add up to GDP.

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{ 1 comment… read it below or add one }

Ian Hickman November 16, 2009 at 1:30 am

Nice summary but it’s a real shame that GDP is used so widely, because it’s not a very good measure of real growth.


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