Gross Domestic Product (GDP)

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Gross Domestic Product

The gross domestic product or GDP of a country is a measure of the amount of economic activity in that country.

Economists study the GDP numbers which are calculated quarterly to determine  the state of the country’s economy.  If the economy is doing well then the GDP should increase.  If the economy is not doing well then the GDP won’t change or it might get smaller.

How is GDP measured?

One definition of GDP is the total expenditures for all goods and services in the country during a certain period of time (ie 1 year).  For an example if you were to go out and buy a plasma television then the cost of the tv would be included in the GDP.  If the economy is doing well then people have more money and can buy more tvs (or any other goods or service) and the GDP will keep increasing.  In good times the economy is said to be expanding.

Of course the opposite is true – if less tvs are purchased then the GDP will shrink and the country might be considered to be in a recession.

Is the GDP measurement accurate?

Probably not.  It’s not easy to measure nation wide statistics and economic transactions are no different.  The GDP is supposed to be a proxy for the standard of living for the nation as well as the health of the economy.  While the measurement may not be perfect, it may not matter that much because the number is always used relative to prior time periods.

For example an economist may study GDP numbers for the last 8 quarters to determine if there is an upward or downward trend.  She may not be too concerned about the accuracy of each measurement but rather the relative change of the number over time.

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