Gross Domestic Product: Definition and Components

Your next lesson will play in 10 seconds
  • 0:44 Definition of GDP
  • 2:04 Consumption
  • 2:38 Government Spending
  • 2:56 Investment
  • 3:18 Exports
  • 3:36 Imports
Create An Account
To Start This Course Today
Used by over 10 million students worldwide
Create An Account
Try it free for 5 days
Lesson Transcript
Instructor: Jon Nash

Jon has taught Economics and Finance and has an MBA in Finance

Learn how economists measure the total production of an economy using gross domestic product (GDP). This lesson also outlines the components that make up a GDP. How do we calculate the economic value of a nation?

Gross Domestic Product

One of the main ideas that economist John Maynard Keynes introduced is the idea that the number one driver of the economy is demand. If we can measure the economy in terms of what everyone spends, then we can estimate the level of production in our economy. We measure the economy using GDP.

GDP stands for gross domestic product. It's the official measure of the total output of goods and services in the economy. The definition of GDP is as follows: it is the total market value of all final goods and services produced during a given time period within a nation's domestic borders.

The word 'domestic' (in 'gross domestic product') means that we're only counting things that are produced within our domestic borders, whether they are produced by Americans or by foreigners. It doesn't matter. Nothing that is produced outside of our domestic borders gets counted in the GDP.

Components of GDP

So, let's talk about the components of GDP, which come directly from the formula for GDP. The formula is as follows: GDP = C + I + G + (X - M). Another way to say this is that gross domestic product = consumption + investment + government spending + (exports - imports). Sometimes GDP is stated this way: gross domestic product = consumption + investment + government spending + net exports.

Now, consumption, which represents all of the purchases of goods and services made by households, accounts for the largest share of GDP, and it has averaged between 65% and 70% for many decades. Examples of consumption include things that consumers buy every day - things like cars, computers, rent, food, utilities and even clothes and other consumer products.

Another component is government spending, which includes federal, state and local spending on things like national defense, social security and the operational expenses of all the levels of government. Examples of investment (which is another GPD component) include the costs of building factories, regular business expenses, the construction of new homes and increases or decreases in business inventories.

To unlock this lesson you must be a Member.
Create your account

Unlock Your Education

See for yourself why 10 million people use

Become a member and start learning now.
Become a Member

Already a member? Log In

Earning College Credit

Did you know… We have over 49 college courses that prepare you to earn credit by exam that is accepted by over 2,000 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Click "next lesson" whenever you finish a lesson and quiz. Got It
You now have full access to our lessons and courses. Watch the lesson now or keep exploring. Got It
You're 25% of the way through this course! Keep going at this rate,and you'll be done before you know it.
The first step is always the hardest! Congrats on finishing your first lesson.
Way to go! If you watch at least 30 minutes of lessons each day you'll master your goals before you know it.
Congratulations on earning a badge for watching 10 videos but you've only scratched the surface. Keep it up!
You've just watched 20 videos and earned a badge for your accomplishment!
You've just earned a badge for watching 50 different lessons. Keep it up, you're making great progress!
You just watched your 100th video lesson. You have earned a badge for this achievement!
Congratulations! You just finished watching your 200th lesson and earned a badge!
Congratulations! You just finished watching your 300th lesson and earned a badge!
You are a superstar! You have earned the prestigious 500 video lessons watched badge.
Incredible. You have just entered the exclusive club and earned the 1000 videos watched badge.
You have earned a badge for watching 20 minutes of lessons.
You have earned a badge for watching 50 minutes of lessons.
You have earned a badge for watching 100 minutes of lessons.
You have earned a badge for watching 250 minutes of lessons.
You have earned a badge for watching 500 minutes of lessons.
You have earned a badge for watching 1000 minutes of lessons.