Gross Domestic Product (GDP) is a way to measure a country’s total economic output, typically over the course of a year. It’s the most used way to see how well a country is doing economically and what their standard of living is like.
To find a country’s GDP, we add up the value of everything made within that country’s borders, whether it was made by them or by someone else. This includes things like consumer goods, government purchases, investments, and exports, but doesn’t include imports.
There are three ways to calculate GDP, but the most common one is called the expenditure approach. This way calculates GDP by adding up how much people spent on things, how much the government spent, how much was invested, and how much was earned from exports (minus imports).
Even though GDP is a broad way to look at a country’s economy, it has some drawbacks. For example, it doesn’t show how wealth is divided up, how the economy affects the environment, or how much leisure time is valuable.
Even so, many people still use GDP to see how well a country is doing. A growing GDP usually means the economy is strong, while a shrinking GDP may mean it’s weak.
The most common formula for calculating Gross Domestic Product (GDP) using the expenditure approach is:
GDP = C + I + G + (X – M)
- C represents Consumer Spending, or the amount spent by households on goods and services.
- I represents Investment, or the spending by businesses on new equipment, buildings, and other investments that will help the economy grow.
- G represents Government Spending, or the amount spent by the government on goods and services.
- X represents Exports, or the value of goods and services produced in the country and sold to other countries.
- M represents Imports, or the value of goods and services produced in other countries and sold in the country.
So, GDP is calculated by adding up the value of all goods and services produced within a country’s borders, including consumer spending, investment, government spending, and exports, and then subtracting the value of imports.