Gross Domestic Product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time.
Economic growth is the increase in the amount of the goods and services produced by an economy over time.
Increase in GDP is the most widely used measure of economic growth.
There are three ways of calculating GDP. They are:
– The expenditure method: which calculates final spending on goods and services
– Income method: which sums the income received by all the producers within the economy
– Output method: which calculates the market value of goods and services produced within the economy.
All the methods logically bring out the same results. For the purpose of this lesson, we will look at the expenditure method in detail.
GDP is the sum of consumer spending, investment, government purchases, and net exports, as represented by the equation:
GDP = C + I + G + (X-M)
Consumer spending, C, is the sum of expenditures by households on durable goods, non-durable goods, and services. Examples include clothing, food, and health care.
Investment, I, is the sum of expenditures on capital equipment, inventories, and structures. Examples include machinery, unsold products, and housing.
Government spending, G, is the sum of expenditures by all government bodies on goods and services. Examples include naval ships and salaries to government employees.
Net exports, (X-M), equals the difference between spending on domestic goods by foreigners and spending on foreign goods by domestic residents. In other words, net exports describes the difference between exports and imports.
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