What is GDP?

Gross Domestic Product (GDP) refers to the total financial value of country’s output. Simply, it measures the size of a country’s Economy over a given time period. The measurements are usually reflected over quarters and years. As a financial measure, it can also be used for comparisons across countries.

There are various nuances in the ways to calculate the GDP of a country – but they are all common in adding up various items with financial values attribute to them.

The most common formula used is GDP = Household Spending + Investment + Government Spending + Net Exports (UK exports internationally – UK imports from other countries). It’s worth noting that Investment in this context means investment by businesses in new activities (Capital Expenditure). This could be investment into new machinery from a business.

An easy observation is that if a GDP is increasing, then the respective Economy of a Country is growing. But it doesn’t tell you the full story. The GDP figures can be misleading – there could be a great deal of spending within a country which will increase the GDP, but this spending could be due to increases in the Defence budget. It also doesn’t say how income is split across the population and also doesn’t take into account the non-financial aspects of a Country such as its values and ethics.

None the less, the GDP is a super important concept to understand. A continuous quarterly decline in GDP is often one of the contributing factors to an official Recession.

<< Learn How to Understand the Economy Essentials

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