Gross Domestic Product

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Description of Gross Domestic Product. Explanation.

 

Definition Gross Domestic Product. Description.


Gross Domestic Product (GDP) is an economic measure of all economic goods and services produced by a country during a specific period of time (normally 1 year).


It is calculated by adding the total value of a country's annual output of goods and services, which is:


GDP  =  Private Consumption + Business Investments in Capital + Government Spending + Change in Inventories + Exports - Imports.

 

GDP differs from Gross National Product (GNP) in excluding inter-country income transfers, in effect attributing to a territory the product generated within it rather than the incomes received in it.


GDP is used as an indicator of the standard of living in an economy. Some limitations in this respect include:

  • GDP does not take into account the black economy.

  • Quality of life contains more things than physical goods (economic or not).

  • GDP doesn't measure the sustainability of growth.

  • If a nation saves money and invests it overseas, such as Japan, it's GDP will be diminished. However there is a future value of this.

  • If a nation spends borrowed money, like the US, it's GDP will be increased. However there is a future negative value of this.


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