What is GDP
GDP stands for Gross Domestic Product. It is a measure of the total value of all final goods and services produced within a country's borders in a specific period, typically a year.
To understand the concept of GDP, you can calculate it using one of the following methods:
1. Expenditure Approach: This method measures GDP by adding up all the spending on final goods and services within the economy. It includes four major components:
- Personal Consumption Expenditures (C): It represents the spending by households on goods and services.
- Gross Private Domestic Investment (I): It includes business investment in capital goods, residential investments, and changes in inventories.
- Government Consumption and Investment (G): It refers to government spending on goods and services.
- Net Exports (X - M): It accounts for the difference between exports (X) and imports (M).
GDP = C + I + G + (X - M)
2. Income Approach: This method calculates GDP by summing up all the incomes earned by individuals and businesses in the economy. It includes various income categories such as wages, salaries, profits, rents, and interest.
GDP = Wages + Salaries + Rent + Interest + Profit
3. Production or Value-Added Approach: This method measures GDP by summing up the value added at each stage of production within an economy. It avoids double-counting of intermediate inputs by only considering the final value of goods and services.
GDP = Value added in all sectors/industries
All these methods provide an overall picture of the size and growth of an economy. GDP is a crucial indicator used by policymakers, investors, and economists to analyze and compare the economic performance of different countries.