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Gross Domestic Product: Definition and Components

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  1. 0:44 Definition of GDP
  2. 2:04 Consumption
  3. 2:38 Government Spending
  4. 2:56 Investment
  5. 3:18 Exports
  6. 3:36 Imports
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Taught by

Jon Nash

Jon has taught Economics and Finance and has an MBA in Finance

Learn how economists measure the total production of an economy using gross domestic product (GDP). This lesson also outlines the components that make up a GDP. How do we calculate the economic value of a nation?

Gross Domestic Product

One of the main ideas that economist John Maynard Keynes introduced is the idea that the number one driver of the economy is demand. If we can measure the economy in terms of what everyone spends, then we can estimate the level of production in our economy. We measure the economy using GDP.

GDP stands for gross domestic product. It's the official measure of the total output of goods and services in the economy. The definition of GDP is as follows: it is the total market value of all final goods and services produced during a given time period within a nation's domestic borders.

The word 'domestic' (in 'gross domestic product') means that we're only counting things that are produced within our domestic borders, whether they are produced by Americans or by foreigners. It doesn't matter. Nothing that is produced outside of our domestic borders gets counted in the GDP.

Components of GDP

So, let's talk about the components of GDP, which come directly from the formula for GDP. The formula is as follows: GDP = C + I + G + (X - M). Another way to say this is that gross domestic product = consumption + investment + government spending + (exports - imports). Sometimes GDP is stated this way: gross domestic product = consumption + investment + government spending + net exports.

Now, consumption, which represents all of the purchases of goods and services made by households, accounts for the largest share of GDP, and it has averaged between 65% and 70% for many decades. Examples of consumption include things that consumers buy every day - things like cars, computers, rent, food, utilities and even clothes and other consumer products.

Another component is government spending, which includes federal, state and local spending on things like national defense, social security and the operational expenses of all the levels of government. Examples of investment (which is another GPD component) include the costs of building factories, regular business expenses, the construction of new homes and increases or decreases in business inventories.

Exports include goods and services that are produced within our borders but sold in other countries. Since money flows into our economy when we sell products and services to foreigners, exports add to our GDP. Imports, on the other hand, are goods and services that are consumed within our country but produced in other countries. Because money flows out from our country to purchase these goods and services, imports subtract from GDP.

Lesson Summary

Now, let's review the key points we talked about. GDP is the total market value of all final goods and services produced during a given time period within a nation's domestic borders. The formula for GDP is as follows: GDP = C + I + G + (X - M). Another way to say this is that gross domestic product = consumption + investment + government spending + (exports - imports). Notice that everything in the formula adds to GDP except for imports. Consumption, which represents all of the purchases of goods and services made by households, accounts for the largest share of GDP, about two-thirds.

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