what is GDP ?

what is GDP ? Gross domestic product (GDP) is an important tool for measuring how a country's economy is doing. hat is GDP and how is it worked out? GDP is a measure of all the economic activity of companies, governments and people in a country. In the UK, new GDP figures are published by the Office of National Statistics (ONS) every month. However, quarterly figures - covering three months at a time - are considered more important. Most economists, politicians and businesses like to see GDP rising steadily. That's because it usually means people are spending more, extra jobs are created, more tax is paid and workers get better pay rises. When GDP is falling, it means the economy is shrinking - which can be bad news for businesses and workers. If GDP falls for two quarters in a row, that is known as a recession, which can lead to pay freezes and job losses. How does GDP affect me? If GDP is going up steadily, people pay more in tax because they're earning and spending more. This means more money for the government, which it can choose to spend on public services, such as schools, police and hospitals. When the economy shrinks and a country goes into recession, these things can go into reverse. Governments tend to get less money in tax, which means they may decide to freeze or cut public spending. Or taxes may rise. How is GDP measured? GDP can be measured in three ways: • Output: The total value of the goods and services produced by all sectors of the economy - agriculture, manufacturing, energy, construction, the service sector and government • Expenditure: The value of goods and services bought by households and by government, investment in machinery and buildings - this also includes the value of exports, minus imports • Income: The value of the income generated, mostly in terms of profits and wages KEY TAKEAWAYS • Gross domestic product is the monetary value of all finished goods and services made within a country during a specific period. • GDP provides an economic snapshot of a country, used to estimate the size of an economy and its growth rate. • GDP can be calculated in three ways, using expenditures, production, or incomes and it can be adjusted for inflation and population to provide deeper insights. • Real GDP takes into account the effects of inflation while nominal GDP does not. • Though it has limitations, GDP is a key tool to guide policymakers, investors, and businesses in strategic decision-making. Understanding Gross Domestic Product (GDP) The calculation of a country’s GDP encompasses all private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs, and the foreign balance of trade. Exports are added to the value and imports are subtracted.1 Of all the components that make up a country’s GDP, the foreign balance of trade is especially important. The GDP of a country tends to increase when the total value of goods and services that domestic producers sell to foreign countries exceeds the total value of foreign goods and services that domestic consumers buy. When this situation occurs, a country is said to have a trade surplus. What Does GDP Tell You? A country's GDP represents the final market value of all the products and services that a country produces in a single year. Another way to measure GDP is as the sum of four factors: consumer spending, government spending, net exports, and total investment. How GDP is calculated ? GDP=C+G+I+NX where: C=Consumption G=Government spending I=Investment NX=Net exports if it it is is not happened, the recession is started All of these activities contribute to the GDP of a country. Consumption refers to private consumption expenditures or consumer spending. Consumers spend money to acquire goods and services, such as groceries and haircuts.8 Consumer spending is the biggest component of GDP, accounting for more than two-thirds of the U.S. GDP.9 Consumer confidence, therefore, has a very significant bearing on economic growth. A high confidence level indicates that consumers are willing to spend, while a low confidence level reflects uncertainty about the future and an unwillingness to spend. Government spending represents government consumption expenditure and gross investment. Governments spend money on equipment, infrastructure, and payroll. Government spending may become more important relative to other components of a country’s GDP when consumer spending and business investment both decline sharply. (This may occur in the wake of a recession, for example.) Investment refers to private domestic investment or capital expenditures. Businesses spend money to invest in their business activities. For example, a business may buy machinery. Business investment is a critical component of GDP since it increases the productive capacity of an economy and boosts employment levels. The net exports formula subtracts total exports from total imports (NX = Exports - Imports). The goods and services that an economy makes that are exported to other countries, less the imports that are purchased by domestic consumers, represent a country’s net exports. All expenditures by companies located in a given country, even if they are foreign companies, are included in this calculation.8