Gross Domestic Product (GDP)

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.

Gross domestic product is usually used as the primary indicator of a country's economic health. It also helps to determine a country's standard of living. According to some experts, GDP is not intended to be a measure of material well-being, but rather an indicator of a 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

A country's GDP is estimated by adding together several different categories. One such category is net exports, which refers to the amount of products that the country sells outside its borders compared to the amount of products it buys from outside its borders. Net exports and consumption are combined with the amount of money that companies invest in growing their own business within the country, which is called 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.

The GDP of the USA in 2021 was estimated to be around $23.3 trillion. This makes it the largest economy in the world, accounting for nearly a quarter of the global GDP. The US GDP is measured by the US Bureau of Economic Analysis and includes private and government consumption, investments, exports and imports.

GDP vs GNP

GDP (Gross Domestic Product) and GNP (Gross National Product) are two measures of a country's economic output. GDP measures the value of all the goods and services produced within a country's borders, while GNP measures the value of all the goods and services produced by a country's citizens, regardless of where they may be located. In other words, GDP is an indicator of economic output within a country, while GNP is an indicator of economic output by a country.

How to Increase GDP? 

1. Increase Government Spending: Governments can increase GDP by increasing spending on infrastructure, education, and research and development. 

2. Increase Tax Cuts: Lowering taxes encourages consumer spending, which increases demand and boosts GDP. 

3. Invest in Education and Training: Educating and training the workforce will increase productivity and output, thus increasing GDP. 

4. Encourage Entrepreneurship: Encouraging entrepreneurship and small business growth can lead to more goods and services being produced, thus increasing GDP. 

5. Increase Exports: Increasing exports will increase demand for local goods and services, leading to increased production and higher GDP. 

6. Increase Domestic Consumption: Increasing consumer spending will increase demand for goods and services, which will lead to increased production and higher GDP.