Gross Domestic Product (GDP)

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Meaning and definition of Gross Domestic Product

The actual definition for Gross Domestic Product (GDP) can be given as the financial value of all finished goods and services generated within a nation’s borders in a certain time period, though GDP is generally evaluated on a yearly basis. This counts all of public and private consumption investments, government outlays, and exports less imports occurring within a specific territory.

As explained by Investopedia, Gross Domestic Product is usually used as the primary indicator of a country’s economic health. Additionally, it also assists in determining a country’s standard of living. According to some experts, GDP is not proposed to determine material well-being, but serves as an indicator of the country’s productivity.

Formula for Gross Domestic Product (GDP)

The general formula used for calculation of the Gross Domestic Product is:

GDP = C + G + I + NX

Where,

C = all private consumption, or consumer spending in a country’s economy

G = the sum of government spending

I = sum of all the business spending on the capital in the country

NX = the total net exports of the country, estimated as total exports less total imports (NX = Exports – Imports)

Components of Gross Domestic Product

The GDP of a country is estimated by adding up various different categories. One such category is the Net Exports, which refers to the amount of products sold out by the country beyond its borders contrasted with the amount of products purchased from outside the borders. This is delineated by the term consumption.net exports and consumption are combined with the amount of money invested by the businesses in growing their own business inside the country, which is referred as investment.

The concluding component added to the other three mentioned above to evaluate a nation’s GDP includes government outlays. This refers to the money spent by government on products. It is actually a net calculation as financial assistance provided by the government to citizens in the form of welfare is deducted while calculating the GDP.

What does GDP show?

The GDP of a country depicts the amount of production being carried out in a country and the income being generated from that production.

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