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  • Writer's picturePatrick Aloisio

What is GDP?

Updated: Jul 22, 2022

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What is GDP?

GDP stands for "Gross Domestic Product"

what is gdp

What does that mean? Like disgusting Amazon orders?

It accounts for the total amount of goods and services sold by a country.

GDP is normally used as the main metric to evaluate a country’s economic health. A year over year growth of a country’s GDP would signify a strong and growing economy. While a decrease year over year might signify a recession or some other negative factor at play.

There’s an official formula used to calculate a country’s GDP: GDP = C + G + I + NX

C is Consumption aka consumer spending. This is the biggest component of GDP and accounts for over 2/3 of the total. C would be everything you are spending on each day.

G is Government spending. This includes payroll for their employees, infrastructure spending like construction, or investment into the military.

I is Investment. This is investment in the private sense. So businesses investing in buying machinery or equipment.

NX is Net Exports. It's the difference between the country's exports and their imports. Meaning you want your country to be producing and exporting more than it is importing.

The two biggest reasons why that's true is:

  1. You want your country to be as self-sufficient as possible where you're not depending on other countries for goods.

  2. When the US exports goods, that means the foreign country needs to purchase them with the US dollars. The demand for US Dollars goes up, which strengthens the value of the US dollar for everyone who holds it.

This approach we used to calculate GDP is called the Expenditure Approach, and is the most common. You can also use the Income Approach or the Production Approach, but all of these should get you the same answer in the end.

Lastly, we have to cover Nominal vs Real GDP. The calculation above would be Nominal GDP, while Real GDP just means the number has been adjusted for inflation. This allows you to accurately compare GDP to other years' performance in the past.

what is gdp

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