What is GDP?
Gross Domestic Product (GDP) is the total monetary value of all final goods and services produced within a country's borders in a given period. It's the headline measure economists use to gauge the size and health of an economy.
GDP is calculated using the expenditure approach as GDP = C + I + G + (X − M), where C is consumption, I is investment, G is government spending, and (X − M) is net exports.
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Step-by-step worked examples
An economy has C=$6,000B, I=$1,500B, G=$2,000B, X=$900B, M=$800B. Find GDP.
Net exports = X - M = 900 - 800 = $100B GDP = C + I + G + (X-M) = 6000 + 1500 + 2000 + 100 GDP = $9,600B
A small country has C=$400B, I=$100B, G=$150B, exports $50B, imports $90B. Find GDP.
Net exports = 50 - 90 = -$40B GDP = 400 + 100 + 150 + (-40) GDP = $610B
GDP was $20,000B last year and grew 3% this year. Find this year's GDP.
Growth amount = 20000 × 0.03 = $600B This year's GDP = 20000 + 600 = $20,600B
Flashcards
Quick quiz
Q1.Which formula correctly calculates GDP using the expenditure approach?
Q2.If imports exceed exports, net exports are:
Q3.Real GDP differs from nominal GDP because it:
Q4.Which of these counts toward GDP?
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Common mistakes
Counting the sale of used goods in GDP. — Correct: GDP only counts NEWLY produced final goods and services, not resales.
Confusing nominal GDP with real GDP. — Correct: Real GDP adjusts for inflation; nominal GDP does not — use real GDP to compare growth over time.
Forgetting to subtract imports in the expenditure formula. — Correct: Net exports = Exports − Imports; imports must be subtracted, not added.
Assuming higher GDP always means higher living standards. — Correct: GDP ignores income distribution, unpaid work, and environmental costs — GDP per capita and other metrics matter too.
FAQ
What is GDP?
Gross Domestic Product is the total monetary value of all final goods and services produced within a country's borders in a given period.
What is the GDP formula?
Using the expenditure approach: GDP = C + I + G + (X − M), where C, I, G are consumption, investment, and government spending, and (X−M) is net exports.
How do you calculate GDP?
Add up consumption, investment, government spending, and net exports (exports minus imports) for the period.
What are examples of GDP components?
Consumption includes household spending on food and services; investment includes business equipment purchases; government spending includes public infrastructure and salaries.