Gross Domestic Product (GDP)

Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the broadest measure of performance of an economy. It is defined as the output of goods and services produced by labor and property located in a country.

Gross domestic product (GDP) is the total market value of all final goods and services produced in a country in a given year.

How is Gross Domestic Product (GDP) calculated?

Gross domestic product (GDP) is equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.

GDP = C + I + G + (X-M)

* C (consumption) is private consumption in the economy. This includes most expenditures of households such as food, rent, medical expenses and so on. This does not include new housing.

* I (investments) is defined as investments by business or households in capital. This includes software, machinery, equipment, etc. Spending by households on new houses is also included in Investment. This does not include investments in securities (that is under savings).

* G (government) is the sum of government expenditures on final goods and services. It includes salaries of public workers, military, and any investment expenditure by a government.

* X (gross exports) captures the amount a country produces, including goods and services produced for other nations' consumption.

* M (gross imports). Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.

How is Gross Domestic Product (GDP) measured?

GDP is measured in a way that the federal government organizes millions of pieces of monthly, quarterly, and annual data from government agencies, companies, and private individuals into hundreds of statistics.

The government (the U.S. Department of Commerce in case of USA) then collects the data into a complete set of statistics known as the National Income and Product Accounts. These statistics include for example the consumer price index (CPI), the employment report, summaries of corporate and individual tax returns, and others.

It is a set of double-entry accounts that provides a consistent and detailed representation of production (GDP) and its associated income (national income).

How GDP affects me?

For example, if the GDP growth rate is increasing, the central bank (Fed in case of the USA) may raise interest rates to stem inflation. In this case, you would want to lock in a fixed-rate mortgage because an adjustable-rate mortgage will start charging higher rates after the central bank acts.

When is GDP released?

The Gross domestic product (GDP) report is released in the USA at 8:30 am EST on the last day of each quarter and reflects the previous quarter.

Note that each initial (preliminary) GDP report will be revised twice before the final figure is settled upon. The advance report is followed by the preliminary report about a month later and a final report a month after that.

How is GDP reported?

The GDP numbers are reported in the following two forms:

  • current dollars GDP
  • constant dollars GDP

The current dollar GDP is calculated using today's dollars and makes comparisons between time periods difficult because of the effects of inflation.

The constant dollar GDP solves this problem by converting the current information into some standard period dollars, such as 1997 dollars.

Difference between GDP and GNP

GDP measures the output of all labor and capital within the country geographical boundary regardless of the residence of that labor or owner of capital.

GNP measures the output supplied by residents of a country regardless of where they live and work or where they own capital.

Conceptually, the GDP measure emphasizes production in a country, while GNP emphasizes income resulting from production in a country.


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