Overview of the Gross Domestic Product Video

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  • 0:01 Gross Domestic Product
  • 0:40 What Is GDP?
  • 2:10 What Isn't GDP?
  • 3:27 GDP Calculations
  • 4:33 Lesson Summary
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Lesson Transcript
Instructor: Christopher Sailus

Chris has an M.A. in history and taught university and high school history.

In this lesson, we explore the economic measurement, gross domestic product (GDP), what is included and what is not, and a few tricks economists use to calculate GDP.

Gross Domestic Product

Have you ever counted everything you own? Perhaps you had to do it as part of a stipulation on your homeowner's insurance, or perhaps you are so organized that you need to know where everything is at all times. This final list you compiled was essentially everything in your immediate possession; the sum total of everything you own. Gross domestic product, or GDP, works kind of like that, except instead of listing everything that each country owns, a country's GDP tells us how much each country produced in a given year. In this lesson, we'll explore exactly what is and isn't considered in GDP calculations and a couple different ways GDP is calculated.

What Is GDP?

GDP refers to the total economic output of one country, often measured by the year. This includes all of the goods that were produced within the country's borders and all of the services performed. It's important to note the second word in the term, 'domestic,' as GDP only counts the goods and services completed within a country's borders.

The basic formula used to compute GDP is GDP = C + I + G + (X - M). In this equation, C stands for consumption. This takes into account all of the purchases of goods and services made by people in the country. This is generally the largest share of GDP, and in the United States, it often accounts for between 65% and 70% of GDP. The I in the equation stands for investment and includes all sorts of business infrastructure development, like building factories all the way down to basic business expenses and inventory increases.

The G stands for government spending and includes all federal, state, and local government spending on things ranging from national defense, to social security, to building roads. The (X - M) stands for net exports, literally a country's exports minus their imports. Exports are goods or services that are produced in one country but are bought by other countries. It is generally a positive thing for a country's GDP. Imports, on the other hand, are goods or services which are created by another country but bought in your country and count against a country's GDP.

What Isn't GDP?

That probably sounds like just about all business conducted in the country, doesn't it? Well, it's not entirely, and there are some important distinctions that we should make. For example, only the goods produced in a country count toward its GDP, regardless of who is making them. So, for example, if the American automotive company Ford produces a car, but the factory that car was assembled in happens to be in Mexico, it does not count toward American GDP, even though Ford is an American company. In fact, if that car is then exported to the United States and sold there, it actually has a negative impact on U.S. GDP. On the other hand, if the Japanese car company Toyota entirely produces a car in its plants in Georgia, that car counts toward U.S. GDP even if the profits made off that car go to a Japanese company.

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