What is the Gross Domestic Product (GDP)?

Published by Thomas Herold in Economics

'Gross Domestic Product (GDP)' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

GDP stands for the entire value in dollars of all goods and services that have actually been produced within the nation in a particular period of time, commonly a year. A simpler way of putting GDP is how large the economy proves to be.

The Gross Domestic Product turns out to be among the most closely watched and important measurements for how healthy the economy is. GDP is commonly given out as a comparison against a prior year or quarter. When the financial news reports that the Gross Domestic Product has increased by three percent year on year, it is referring to the economy having expanded by three percent during the last year.

Coming up with the actual measurement of Gross Domestic Product is complex. In simplest terms, it is figured up in one of two methods. The income approach works by totaling up the earnings of all individuals in the country over a year. The expenditure approach simply tallies up the money that everyone in the nation spends over the year. It stands to reason that through both means you should come to approximately a similar total.

With the income approach, economists take all of the employees’ compensation in the nation. They add this to all of the profits that both non incorporated, as well as incorporated, companies have made throughout the country. Finally they add on all taxes paid minus subsidies given. This is known as the GDP(I) method of calculation. The expenditure based means proves to be the more typically utilized method. To figure up GDP this way, all government spending, net exports, consumption, and investment in the country have to be tallied up together.

You can not overstate the importance of GDP to an economy’s growth and production. Almost every person within the nation is massively impacted by gross domestic product. If an economy is in good shape, then wages will rise and unemployment will prove to be low as businesses require greater quantities of labor in order to produce to keep up with the expanding economy. Major changes to Gross Domestic Product, revised to the downside or upside , have significant repercussions for the stock markets. The reasons for this are simple to grasp.

Economies that are contracting translate to smaller amounts of profits for corporations. This leads to lower prices for stocks. Investors also become nervous about decreasing growth in GDP, since it commonly means that the nation’s economy is falling into recession or is already in a recession.

Conversely, economies that are expanding signify that corporations’ profits in general will be higher. Investors bid stock prices up on this news as they become increasingly confident in the future economic prospects. Because of these effects of Gross Domestic Product on peoples’ lives, it could be said to be the most significant economic measurement for all of the people in the country in general.

Free Download (No Signup Required) - The 100 Most Important Financial Terms You Should Know!
This practical financial dictionary helps you understand and comprehend the 100 most important financial terms.

The term 'Gross Domestic Product (GDP)' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.