What is Gross Domestic Product?

I’m sure you’ve heard of Gross Domestic Product (GDP) before in your finance or history class back in high school. But what is GDP? If you have no idea don’t worry you’re not alone. There are plenty of people out there who are just as clueless. But don’t worry, after you read this article you will have a better grasp of what GDP is and how it affects your daily life.

When most people think about economics they don’t usually understand how it affects their personal lives. I discussed that topic briefly in my previous article regarding economics, micro vs macro economics. So, with that information already available, let’s focus on GDP in this article.

What is Gross Domestic Product?

The textbook definition is: the total value of all the finished goods and services produced in a specific time period by a country. To break it down further, this is a measurement for how much economic activity occurred in that set time. It tells you how active or inactive a country is in the global market. This is not to be confused with the wealth of the country.

Wealth is a measure of the potential the country has to have meaningful production in the future. Secondly, GDP is a measure of income not assets. Kind of like a backward flow measurement on how valuable the goods and services were during a period of time. Thirdly, you calculate a country’s wealth similarly to how you would an individual. By taking the amount of debt a country has and subtracting that from the country’s assets and liabilities.

How to Calculate Gross Domestic Product?

So, now that we have defined GDP, how do you calculate it? Well, GDP is a culmination of different parts of the economy. So, if you take the private consumption, gross private investment, government investment, the government spending, and the value of your exports minus your imports and you add all of that together you get your GDP. See that wasn’t so bad!

But seriously what does any of that mean? I won’t break down the obvious ones but I will get to the more unfamiliar terms, like gross private investment. Like eww. So, what is gross private investment? Well, it is the purchase of equipment by firms, the purchase of all newly produced structures, and changes in business inventories.

What does GDP Affect?

GDP affects quite a few things. I won’t list them all out here. But, what I will provide you with are a few details that you can relate to. GDP is often cited when assessing the standard of living of a country. So, if you feel like you have great, good or absolutely bad standard of living, what your country’s GDP is matters. Though this all seems like you are a small fish in a massive ocean, understand that any little push from you in a positive direction does have an impact in the economy of your country.

Takeaways

Though this is just an overview, this should give you a really good foundation regarding what GDP actually is. This topic can get quite complicated and I try to make my articles a little bit on the dumb down side. I do that because I know that is how I learn and hopefully that helps some of you out there as well. I implore you to continue doing more research and finding additional resources to learn. Understanding how the world economy works will expand your mind on how to play the game better. As the great Michael Scott once said “Mo Money, Mo Problems.”

If you ever feel like you forget just jump back into this article and you’ll be right back on track. As long as what the article is interesting and you learned something you are still on your way to becoming an average genius. Stay active and keep learning. The key to being an average genius is to admit that you don’t know everything. Admit it and then go out and seek answers. Enjoy the adventure.