Equations for GDP
Gross domestic product (GDP) is a means of measuring business or economic activity within a country. Since GDP totals the prices of all goods and services produced and sold within an entire country during a given time frame (usually quarterly or in a year), the numbers are extremely large. The United States GDP in 2010 was over $14 trillion, for example. However, even with such large numbers, arriving at a country's gross domestic product figure entails adding only a few important figures.
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Consumer Spending
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Calculating a country's gross national product is done by first determining consumer spending for a given period. This is the total amount the citizens of a country spend on their household items, such as food and clothing. The consumer spending sector is one of the four primary areas measured to arrive at GDP. Personal consumption is usually the largest portion of the GPD equation, by a considerable margin.
Business Investment
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Investing in business-related equipment, supplies (such as inventory) and various structures, and subsequently using the total amount of business investment is the next part of the GDP equation. These are items such as manufacturing equipment, a new manufacturing facility or software designed to help a business grow and run more efficiently. The sum of all business investment is added to the consumer spending figure to get closer to the GDP figure.
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Government Investment
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Calculating GDP includes business investment as noted above, however, local, state and national governmental entities also invest in things such as bridges and roads that need to be taken into account when determining the gross domestic product of a country. Incomes earned by government employees are also included in the final GDP calculation. Adding the total government investment figure to the two above (business investment and consumer spending) nearly completes the process.
Imports and Exports
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Finalizing the GDP calculation entails inclusion of what is referred to as net exports. This figure is arrived at by subtracting all the spending on domestic goods and services by foreign buyers by the total amount spent by citizens on foreign goods and services. Then the net export figure is added to the three numbers above, and the country's gross domestic product is calculated.
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