Gdp what is it

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Skip to main content. What is GDP? Perhaps the most talked about economic concept. But what is it and how do we measure it? Gross domestic product or GDP is perhaps the most talked about economic concept. How is GDP calculated? The last measure, total spending, is perhaps the most familiar and can be broken down as: Household spending forms the biggest part, accounting for about two thirds of GDP.

When GDP goes up, the economy is growing — people are spending more and businesses may be expanding. GDP growth, however, is not the whole story when gauging how well economies are doing. What are wider measures of well-being? Find out more Why does economic growth matter?

How has growth changed over time? How fast can the economy grow? You may also be interested in…. The change of GDP over time is the most important indicator of economic growth. More information on the various uses of national accounts in general and GDP in particular is provided in a separate article.

Back to Statistics 4 beginners — Introduction. Tools What links here Special pages. Full article. Example If an engineering company produces some special machines for its own use, a building company builds new offices for itself, or a business develops software for in-house use, these are included in GDP, even though this production is not actually sold.

Equally, if Josefina builds or makes a major change to her own house by herself that would be counted as part of GDP as would any construction work done by unpaid volunteers. So, what work does GDP not reflect? Does GDP have a family? How can GDP be used as a benchmark? For government finance statistics Another example is when considering how much money governments borrow or lend during a year and how much public debt money the government owes they have built up over time; these are often presented relative to GDP.

These are just two examples where GDP is used as a reference: there are many more cases. Who is interested in GDP and why? Direct access to. Dedicated section. Category : Statistics 4 beginners. Real GDP is calculated using a GDP price deflator , which is the difference in prices between the current year and the base year. Real GDP accounts for changes in market value and thus narrows the difference between output figures from year to year.

It indicates that the amount of output or income per person in an economy can indicate average productivity or average living standards. GDP per capita can be stated in nominal, real inflation-adjusted , or PPP purchasing power parity terms. At a basic interpretation, per-capita GDP shows how much economic production value can be attributed to each individual citizen.

This also translates to a measure of overall national wealth since GDP market value per person also readily serves as a prosperity measure. Therefore, it can be important to understand how each factor contributes to the overall result and is affecting per-capita GDP growth. Some countries may have a high per-capita GDP but a small population, which usually means they have built up a self-sufficient economy based on an abundance of special resources.

Usually expressed as a percentage rate, this measure is popular for economic policy-makers because GDP growth is thought to be closely connected to key policy targets such as inflation and unemployment rates. Conversely, central banks see a shrinking or negative GDP growth rate i.

GDP can be determined via three primary methods. All three methods should yield the same figure when correctly calculated. These three approaches are often termed the expenditure approach, the output or production approach, and the income approach. The expenditure approach, also known as the spending approach, calculates spending by the different groups that participate in the economy.

The U. GDP is primarily measured based on the expenditure approach. This approach can be calculated using the following formula:. All of these activities contribute to the GDP of a country.

Consumption refers to private consumption expenditures or consumer spending. Consumers spend money to acquire goods and services, such as groceries and haircuts. Consumer spending is the biggest component of GDP, accounting for more than two-thirds of the U. Consumer confidence, therefore, has a very significant bearing on economic growth. A high confidence level indicates that consumers are willing to spend, while a low confidence level reflects uncertainty about the future and an unwillingness to spend.

Government spending represents government consumption expenditure and gross investment. Governments spend money on equipment, infrastructure, and payroll. This may occur in the wake of a recession, for example. Investment refers to private domestic investment or capital expenditures. Businesses spend money to invest in their business activities.

For example, a business may buy machinery. Business investment is a critical component of GDP since it increases the productive capacity of an economy and boosts employment levels. All expenditures by companies located in a given country, even if they are foreign companies, are included in this calculation.

The production approach is essentially the reverse of the expenditure approach. Instead of measuring the input costs that contribute to economic activity, the production approach estimates the total value of economic output and deducts the cost of intermediate goods that are consumed in the process like those of materials and services.

Whereas the expenditure approach projects forward from costs, the production approach looks backward from the vantage point of a state of completed economic activity. The income approach represents a kind of middle ground between the two other approaches to calculating GDP. The income approach calculates the income earned by all the factors of production in an economy, including the wages paid to labor, the rent earned by land, the return on capital in the form of interest, and corporate profits.

The income approach factors in some adjustments for those items that are not considered payments made to factors of production. For one, there are some taxes—such as sales taxes and property taxes —that are classified as indirect business taxes. In addition, depreciation —a reserve that businesses set aside to account for the replacement of equipment that tends to wear down with use—is also added to the national income. Although GDP is a widely used metric, there are other ways of measuring the economic growth of a country.

While GDP measures the economic activity within the physical borders of a country whether the producers are native to that country or foreign-owned entities , gross national product GNP is a measurement of the overall production of people or corporations native to a country, including those based abroad.

GNP excludes domestic production by foreigners. Gross national income GNI is another measure of economic growth. It is the sum of all income earned by citizens or nationals of a country regardless of whether the underlying economic activity takes place domestically or abroad.

With GNI, the income of a country is calculated as its domestic income, plus its indirect business taxes and depreciation as well as its net foreign factor income. The figure for net foreign factor income is calculated by subtracting all payments made to foreign companies and individuals from all payments made to domestic businesses.

In an increasingly global economy, GNI has been put forward as a potentially better metric for overall economic health than GDP. Because certain countries have most of their income withdrawn abroad by foreign corporations and individuals, their GDP figure is much higher than the figure that represents their GNI. On the contrary, in the U. In , U. Part of the reason for this is that population size and cost of living are not consistent around the world.

For example, comparing the nominal GDP of China to the nominal GDP of Ireland would not provide much meaningful information about the realities of living in those countries because China has approximately times the population of Ireland.

To help solve this problem, statisticians sometimes compare GDP per capita between countries. Even so, the measure is still imperfect. Purchasing power parity PPP attempts to solve this problem by comparing how many goods and services an exchange-rate-adjusted unit of money can purchase in different countries—comparing the price of an item, or basket of items, in two countries after adjusting for the exchange rate between the two, in effect.

Real per-capita GDP, adjusted for purchasing power parity, is a heavily refined statistic to measure true income, which is an important element of well-being.

In nominal terms, the worker in Ireland is better off. Most nations release GDP data every month and quarter. The BEA releases are exhaustive and contain a wealth of detail, enabling economists and investors to obtain information and insights on various aspects of the economy.

However, GDP data can have an impact on markets if the actual numbers differ considerably from expectations. Because GDP provides a direct indication of the health and growth of the economy, businesses can use GDP as a guide to their business strategy.

Government entities, such as the Fed in the U.