GDP, or Gross Domestic Product, is a monetary measure that represents the market value of all final goods and services produced in a country during a specific period, typically a year or a quarter. It is commonly used as an indicator of a country's economic health and to gauge its standard of living.
There are three main approaches to calculating GDP:
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Production (or Output) Approach: This approach sums the value added at each stage of production for all goods and services produced in the economy.
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Income Approach: This method calculates GDP by summing all incomes earned by individuals and businesses in the economy, including wages, profits, rents, and taxes (minus subsidies).
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Expenditure Approach: This approach totals all expenditures made in the economy, represented by the formula:
\[ \text{GDP} = C + I + G + (X - M) \]
Where:
- \(C\) = Consumption (spending by households)
- \(I\) = Investment (spending on capital goods)
- \(G\) = Government spending
- \(X\) = Exports of goods and services
- \(M\) = Imports of goods and services
GDP can be reported in nominal terms (not adjusted for inflation) or real terms (adjusted for inflation), allowing for more accurate comparisons over time. It can also be measured on a per capita basis to provide insight into the average economic output per person in a country.
It's important to note that while GDP is a useful indicator of economic activity, it does not account for the distribution of income among residents of a country, nor does it measure the informal economy or consider environmental factors.