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DEFINITION:
Gross domestic product (GDP) is the total value of all goods and services produced by a country within a given period.
Understanding Gross Domestic Product (GDP)
Gross domestic product measures the value of everything a country produces. It is almost impossible to make a comprehensive list of the things included in GDP – it would be very long – but there is a formula that can be used to determine a country’s GDP:
Net exports + investment + consumption + government spending = GDP.
You can find net exports with another, simpler equation:
Value of Exports – Value of Imports = Net Exports.
The result can be a negative number if the country imports more than it exports. Investment and consumption include all the money consumers put into investments such as stocks and bonds. Consumption is the total of all spending on goods and services.
Unlike GNP (gross national product), which captures the total output of a country’s citizens regardless of their geographic location, GDP focuses on output within a country’s borders.
EXAMPLE
Let’s take a look at Microsoft. Every good or service Microsoft produces or sells in the United States contributes to the country’s GDP. Every time someone buys a subscription to Microsoft’s cloud storage service, OneDrive, that purchase contributes to the country’s GDP. Every time the company makes a Microsoft Surface, its value is added to GDP. Even if Microsoft later sells the Surface in another country, its value still counts toward the GDP of the United States.
Takeaway
Gross Domestic Product is like an economic report card…
Most countries record and report their GDP each year. Many groups, such as the World Bank and IMF, use this information and require member countries to provide it. Since GDP can be calculated using information that’s usually publicly available, you can determine the GDP of countries that don’t do these calculations themselves. The higher a country’s GDP, the more goods and services are produced. A higher GDP generally indicates a stronger economy. Therefore, countries are happy when they can report a higher GDP every year, just like students get a better grade every semester.