DEFINITION of GDP
GDP or Gross domestic product is the best way to measure a country’s economy.
WHAT IT IS IN ESSENCE
It is the best indicator of the size and health of a country’s economy.
Gross domestic product is the total value of everything all the people and companies in the country are producing.
It doesn’t matter if they are citizens or foreign-owned companies. If they are located within the country’s boundaries, the government counts their production as GDP.
The only exception is the shadow or black economy.
A country’s gross domestic product consider all of the private and public spending and output. It includes government spending, business, and consumer consumption, investments and net exports (total exports minus total imports). GDP is usually calculated yearly but can be for any time period.
GDP is usually reported on a quarterly basis and can have a major impact on financial markets.
The components of the gross domestic product are:
Personal Consumption Expenditures plus Business Investment plus Government Spending plus (Exports minus Imports).
When you know what the components are, it’s easy to calculate a country’s gross domestic product using this standard formula:
C + I + G + (X-M).
HOW TO USE
Why GDP is so important?
The gross domestic product impacts personal finance, investments, and job growth. Investors look at the growth rate to decide if they should adjust their asset allocation. They also compare country growth rates to decide where the best opportunities are.
Most investors like to purchase shares of companies that are in rapidly growing countries.
The gross domestic product is the total of all value added created in an economy.
The value-added means the value of goods and services that have been produced, minus the value of the goods and services needed to produce them, the so-called intermediate consumption. There are many different ways to measure a country’s GDP.
It’s important to know all the different types and how to use them.
Nominal GDP: This is the raw measurement that includes price increases.
Real GDP: To compare the economic output from one year to another, you must account for the effects of inflation.
Growth Rate: The gross domestic product growth rate is the percentage increase in gross domestic product from quarter to quarter. It tells you exactly how fast a country’s economy is growing.
GDP per Capita: This is the best way to compare gross domestic product between countries. Some countries have enormous economic outputs because they have so many people. To get a more accurate picture, it’s helpful to use GDP per capita. This divides the gross domestic product by the number of residents.
The best way to compare gross domestic product by year and between countries is with real gross domestic product per capita.
This takes out the effects of inflation, exchange rates, and differences in population.