GDP is a measure of how much goods and services are produced in a country in a certain time period. It is an important indicator of a nation’s economic health, and changes in GDP are watched by economists, investors, and policymakers around the world. The growth or contraction of GDP is usually a good indication of whether a country is in recession or experiencing inflation.
In order to calculate GDP, a country’s national statistical agency compiles information from many sources. Most countries follow international standards for measuring GDP, set forth in the System of National Accounts, 1993, a joint publication of the International Monetary Fund, the European Commission, the Organization for Economic Cooperation and Development, and the World Bank.
The four main components of GDP are consumption (C), investment (I), government spending (G), and net exports (X – M). C represents the purchases by households and private businesses of final goods and services. This includes things like food, jewelry, gasoline, and medical care.
I represents business investment. Businesses spend money on equipment and other assets in order to increase their production capabilities. This is a critical component of GDP because it increases the number of jobs and wages in an economy.
Government spending represents the amount of money that a country’s government spends on services such as education, defence, and roads. This is a cyclical component of GDP that tends to be larger during recessions or when the unemployment rate rises. The sum of G and I is equal to a country’s total expenditure on goods and services. However, to avoid double-counting, the sum of imports must be subtracted from X and M.