The gross domestic product (GDP) of a country is the total value of all final goods and services produced in that country in a given period of time. GDP includes all consumer, investment and government spending. To this, add the value of exports and subtract the value of imports for the total GDP. The GDP, and the percentage of its growth, is considered to be one of the primary indicators of the condition of a country's economy.
Calculation of GDP
There are two ways to calculate GDP. One is the income approach, which involves adding up what everyone earned. This would include total compensation to employees, gross profits of businesses, and taxes less subsidies. The second, and most common, is the expenditure approach, which calculates total consumption, investments, government spending and net exports. The two approaches should yield similar results and indicate economic production and growth.
In the U.S., the report on the GDP is released at 8:30 a.m. on the last day of each quarter for the previous quarter. This initial GDP report is revised and reissued twice before the final figure is accepted. The first report issued is called the advance report. The preliminary report is released a month later, and the final a month after that. The GDP is reported in two forms: current and constant. Current is in the dollar figure at time of issuance. The constant refers to a standard of dollars at a particular time in the past. This is to account for inflation.
Use of GDP
The GDP shows how well the economy is doing. In the U.S., GDP growth historically averages 2.5 to 3 percent a year. Comparison with that average indicates whether the economy is growing normally, in a boom cycle, possibly falling into recession, or somewhere in between. The stock market typically reacts to the GDP report, and can be affected if the final report differs from the advance version. Economists study the GDP to help determine the extent of inflation.
Gross National Product
The gross national product (GNP) differs from the GDP. GDP tallies the value of goods and services produced within the boundaries of the United States. GNP includes GDP and adds to it the value of goods and services produced by U.S. firms in foreign countries.
- Photo Credit Jupiterimages/Photos.com/Getty Images