Gross domestic product

The gross domestic product (GDP) or gross domestic income (GDI) is one of the measures of national income and input for a given country's economy. GDP is defined as the total cost of all finished goods and services produced within the country in a stipulated period of time (usually a 365-day year). It is sometimes regarded as the sum of profits added at every level of production (the intermediate stages) of all final goods and services produced within a country in a stipulated timeframe, and it is rarely given a monetary value.

The most common approach to measuring and quantifying GDP is the expenditure method:
GDP = consumption + gross investment + government spending + (exports − imports), or,
GDP = C + I + G + (X-M).

"Gross" means that depreciation of capital stock is not taken into consideration. If net investment (which is gross investment taking depreciation into consideration) is substituted for gross investment in the equation above, then the formula for net domestic product is obtained. Consumption and investment in this equation are expenditure on final goods and services. The exports-minus-imports part of the equation (often called net exports) adjusts this by subtracting the part of this expenditure not produced domestically (the imports), and adding back in domestic area (the exports).

Economists (since Keynes) have preferred to split the general consumption term into two parts; private consumption, and public sector (or government) spending. Two advantages of dividing total consumption this way in theoretical macroeconomics are:
1. Private consumption is a central concern of welfare economics. The private investment and trade portions of the economy are ultimately directed (in mainstream economic models) to increases in long-term private consumption.
2. If separated from endogenous private consumption, government consumption can be treated as exogenous,[citation needed] so that different government spending levels can be considered within a meaningful macroeconomic framework.

The components of GDP
Each of the variables C (Consumption), I (Investment), G (Government spending) and X-M (Net Exports) (where GDP = C + I + G + (X-M) as above)
(Note: * GDP is sometimes also referred to as Y in reference to a GDP graph)
1. C (Consumption) is private consumption in the economy. This includes most personal expenditures of households such as food, rent, medical expenses and so on but does not include new housing.
2. I (Investment) is defined as investments by business or households in capital. Examples of investment by a business include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment. In contrast to its colloquial meaning, 'Investment' in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. The distinction is (in theory) clear: if money is converted into goods or services, it is investment; but, if you buy a bond or a share of stock, this transfer payment is excluded from the GDP sum. That is because the stocks and bonds affect the financial capital which in turn affects the production and sales which in turn affects the investments. So stocks and bonds indirectly affect the GDP. Although such purchases would be called investments in normal speech, from the total-economy point of view, this is simply swapping of deeds, and not part of real production or the GDP formula.
3. G (Government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits.
4. X (Exports) is gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.
5. M (Imports) is gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.


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