Gross domestic product (GDP)

What is GDP? Gross Domestic Product explained

Gross domestic product (GDP) is a monetary measure of the total amount of final goods and services produced by a country in a specific period of time, usually a year or a quarter. The economic performance of a country, region or town is determined by the use of the nominal GDP, as well as to make international comparisons.

GDP measures all public and private consumption, investments, export minus import balance, and government outlays that happen within a particular territory. It is broadly accepted as the main indicator of a nation’s overall economic activity.

GDP Formula

The formula to calculate the GDP is: GDP = C + G + I + NX, where C is the total amount of private consumption; G is the sum of government spending; I equals all the investment, including businesses capital expenditures; and NX is the calculation of total exports minus total imports.

GDP Calculation

There are three approaches by which GDP can be calculated: the expenditure approach, the production approach and the income approach.

The expenditure approach. GDP is measured by the total costs of materials and services that go under the production of a given good or service.

The production approach. Whereas the expenditure approach projects forward beyond intermediate costs, the production approach looks backward from the vantage of a state of completed economic activity.

The income approach, also known as gross domestic income (GDI). It totals domestic incomes earned at all levels and using gross income as an indicator of implied productivity and expenditure.

The impact of inflation or deflation can be removed from the calculation of the GDP, producing what is called real GDP or gross national product (GNP) (inflation adjusted). This is achieved by applying a price deflator to nominal GDP/GNP.

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Category: Financial Glossary

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