RebelCapitalist: Financial Information for the Rest of Us

What is GDP?

We heard this morning (10/30/08) that GDP was down .3%. What is GDP and why is it important?

Your Answer

GDP - Gross Domestic Product

Posted by: Mr_Blue on 2008 10 30

The U.S. Commerce Department released the new GDP number that showed that GDP decreased by an annual rate of .3%. What does this mean? First, GDP stands for Gross Domestic Product. Gross Domestic Product measures the amount of national income and output of a country. GDP is also the measure economists examine in order to determine whether we are experiencing an economic recession or growth.

GDP is a formula or methodology (technical word). GDP consists of the following components: consumption, gross investment, government spending, net exports (exports minus imports).

GDP = Consumption + Gross investment + Government Spending + Net Exports

Consumption - private (personal) consumption of goods and services. This includes purchases of refrigerators, T.V., computers or durable goods and purchases of fuel, groceries, newspapers, clothes or non-durable goods and purchase of services such as medical services, legal and even video rentals.

Gross investment – this is mainly business investment such as the purchase of new equipment. It also includes new home construction during that year and changes in business inventory.

Government spending – government expenditures on goods and services. It does not include transfer payments such as medicare, Medicaid or social security and interest on government debt.

Net exports – exports minus imports. Exports includes goods and services that are for consumption by foreign countries.

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