What is GDP?
What is GDP or Gross Domestic Product? Economic growth as measured by the Gross Domestic Product (GDP) is the most important macroeconomic indicator for citizens, media, politicians, central bankers, and CEOs.
When people talk about growth rates and say â€œthe economy is shrinking,â€ or â€œwe are in recession,â€ or â€œthe economy is overheating,â€ what they are actually referring to is the the Gross Domestic Product. The GDP is the broadest measure of a country’s economic activity, and almost all economic indicators provide information about the GDP.
Why is it called the Gross Domestic Product?
It is called â€œgrossâ€ because it doesnâ€™t account for depreciation. It is â€œdomesticâ€ because it includes expenditure on goods and services produced only inside the country and not by nationals outside the country. It is the entire nation’s scorecard. It is keenly watched by policy makers, central banks, economists, traders and countless others both domestically and internationally.
We see incredible volumes of data every single day in the working world that gives us some indication of economic activity. We see financial news on consumer spending, new home sales, payrolls data, auto sales, or reports on consumer confidence that gives us some indication on where the economy is heading. Therefore, the GDP report is the single most important indicator tracked by millions of people worldwide and its consequences are far reaching in financial markets. Not only do people track the GDP of their own country but other countries as well.
In order to understand GDP concepts, we begin with some very fundamental economic definitions. We then explain how GDP is computed by starting with a simple hypothetical country. Some very important basic concepts can be established by taking an example of a hypothetical economy. We then build incrementally on this hypothetical model to a more realistic model by adding on the components of GDP.
At the end of this entire section you will have a very good understanding of how each component of GDP contributes to the total, the historical context of growth in the United States and its importance in determining the health of the economy.