What is Gross Domestic Product (GDP)?

//What is Gross Domestic Product (GDP)?
What is Gross Domestic Product (GDP)? 2017-10-04T22:23:04+00:00

Definition: Gross Domestic Product, or GDP, represents the total value of a country’s economic output in a given time period. In other words, it’s the dollar amount of all goods and services that a country produces during the period. The GDP formula is calculated by adding up all of consumer or private spending, government spending, business’ capital spending, and net exports.

What Does GDP Mean?

Gross Domestic Product = C + G + I + NX

This is one indicator of how well a country’s economic is doing. Typically the greater the spending, the more successful the country is. Economists track countries spending over time to analyze whether their economies are growing or shrinking in comparison to other countries. They also use this number as an indicator of the standard of living in that country. The thought process here is that as a country’s commodities grow in value in the rest of the world, its standard of living will increase because the country profits from making these goods and services. Additionally, in business, GDP figures can also point to performance trends in the stock market showing whether a country is in recession or not.

Let’s look at an example to answer the question, what does GDP stand for?

Example

During the Great Recession from mid-2007 to 2009, the US economy contracted and in the process devastated many consumers, companies, and investors. However, during the fourth quarter of 2007 and the third and fourth quarters of 2008, US GDP numbers told a chilling story. The growth plummeted during this time, and the economy contracted 4.1% in the last two quarters of 2008. This means less businesses were producing products, people were losing jobs, and more people were unable to afford products.

This decline continued into the first two quarters of 2009. Eventually the growth began increasing, and by the end of 2010, GDP had its first actual growth from pre-crisis levels. These increases coincided with the beginning of a recovery from the Great Recession. That is why many people look at these figures for signs of the economy’s growth.

GDP figures are often vital indicators for the health and future of our economy, and the slowing and eventually decreasing numbers during this recession showed how deep the recession had hurt the US economy.

Although this measurement is a helpful indicator, it’s not an exact science. The numbers don’t show unofficial output like goods bought and sold on the black market. It also doesn’t indicate citizens’ happiness or wellbeing. It merely measures their overall output and production for a period.