Gross Domestic Product (GDP)Financial Dictionary -> General Finance -> Gross Domestic Product (GDP)
There are a number of factors that go into the calculation of GDP, some more widely used than others. The most common calculation takes in to account:
- All of the country's consumer spending. (A)
- All of the country's governmental spending. (B)
- All of the country's business spending. (C)
- The total income from the country's annual exports. (D)
- Minus the total value of imports. (E)
Therefore GDP = A + B + C + D - E
Sometimes GDP is calculated by taking the monetary value from the total amount of products produced in the year, although that doesn't necessarily mean all of those products were bought, so therefore this method is less accurate than the above method. There are of course many transactions that fall under the government's radar (this is known as underground spending), so GDP is only a rough guide.
The data produced by GDP is interpreted in a number of ways. Some use it to measure the productivity of the country, in that it shows how much product was produced and sold. Others use it to measure the general health of the economy and the standard of living of those living in it. For example during an economic recession there is likely to be less consumer spending.
All economies are looking for a consistent amount of growth in GDP each year. Historically the annual GDP growth in the United States has been 2.5 to 3 percent.
A similar calculation is Gross National Product which takes in to account products produced by domestic firms operating in other countries.