What is GDP?

Read time:

4–6 minutes

First things first:

GDP stands for Gross Domestic Product.
Gross Domestic Product is the value of the goods and services produced by a country within a certain time period.

Intro to Econ

To best understand GDP, let’s scale this down a bit. Before we talk about the entire country’s goods and services, let’s think of this as if it were a company. Stay with me through this example and I promise it will start coming together!

Let’s imagine you own a Coffee Shop. It is a very basic coffee shop and only offers one product – a $6.00 latte. Luckily, you are still in business because this latte is the most delectable coffee known to man.

In addition to your one product, you also offer one service: a latte art class. People come to your shop, pay for the class, and learn how to make those cute little latte art designs you see on Pinterest. You charge $20 for this class.

This month, you sold 1,200 lattes. You also had two latte art classes, and 15 people attended each one. Let’s look into how much money you made this month from your shop.

1,200 lattes x $6.00 per latte = $7,200 made from lattes

2 classes x 15 people x $20 per person = $600 made from the classes

$7,200 from lattes + $600 from classes = $7,800 total money made

How exciting! You coffee shop brought in $7,800 this month. This money was earned from selling goods (your lattes) and services (the classes). You could say that the coffee shop’s total Gross Domestic Product, or GDP, was $7,800 this month!

Now that we understand the concept, let’s think about this on a national scale. In Quarter 1 (January through March) of 2023, the United States GDP was 26.8 trillion dollars – a little bit more than the coffee shop! This means that people in the United States produced a bunch of goods and provided a lot of services during the first quarter: $26.8 trillion of goods and services to be exact (FRED, Gross Domestic Product 2023 Q1).

So who is buying this stuff and who is paying for these services?

First, as I’m sure you guessed, other countries are buying these things! A good or service purchased by someone in another country is called an Export. Exports usually make up the smallest portion of the United States GDP.

So who else is buying our stuff? Us! People in the U.S. are buying a ton of stuff and paying for a bunch of services. About two thirds of the United States GDP is from Consumer Spending. Who are consumers? All of us regular people!

But that’s not all – our government is also buying our stuff. This portion of the GDP we call Government Spending.

The last portion of the GDP is Investment Spending. This is the portion that people in the United States spent on Investments. Now, I’m not talking about the stock market or anything like that. When we talk about the GDP Investments, we’re talking important things like equipment to make products, factories for manufacturing, offices for companies to work in, and other things that will help us make more stuff in the future. These things are considered Investments because they will help increase our GDP later on.

So why am I rattling on about Consumer Spending and Investments and all of this boring stuff? Well, I’m trying to give you background information to help you understand this formula I’m about to throw at you.

This, my friends, is the formula used to calculate a country’s GDP:

C + I + G + (X – M) = Nominal GDP

… ew

Now you know why they call it gross domestic product.

I will clear this all up with a little graphic I’ve made in Canva, but first, let’s quickly define something.

Imports: Goods and services people in the United States bought from other countries and brought into the U.S.

This applies to other countries as well, of course. If you live in France and purchase something from Brazil, you are purchasing an Import!

Okay, time for the Canva graphic.

So as you can see here, GDP is made up of Consumer Spending, Investments, Government Spending, and our Exports minus our Imports. That answer is the total value of our goods and services: our GDP.

Let’s summarize to wrap things up!

GDP stands for Gross Domestic Product
GDP is the total value of a country’s goods and services produced over a certain period of time
We usually look at a country’s GDP by year or by quarter (1/4 of the year, or 3 months)
Exports are goods and services purchased by other countries and sent out of the U.S. Imports are goods and services purchased from other countries and brought in to the U.S.
For calculating the Exports & Imports portion of GDP, we want to find the Exports minus the imports.
To find the total value of a country’s GDP, add Consumer Spending, Investments, Government Spending, and the country’s Exports minus their Imports!
GDP is an important indicator of a country’s economic health. Economists, financial professionals, analysts, and scientists spend a lot of time researching GDP to understand more about a country and its economy.

If you’re interested in looking at the Gross Domestic Product of different countries around the world, click here.

I hope you’ve enjoyed this article and that I’ve clearly answered the question ‘What is GDP?’ If you are interested in learning about GDP per capita, GDP growth, or what it means if GDP is negative, feel free to ask! I am always happy to write an article answering your questions.

References:

– 2023 Q1 GDP: FRED

https://fred.stlouisfed.org/graph/?g=1ef12

– Exports: U.S. GDP

https://www.statista.com/statistics/258779/us-exports-as-a-percentage-of-gdp/

– Consumer Spending: U.S. GDP

https://fred.stlouisfed.org/graph/?g=1ef3h

– GDP Formula

https://www.educba.com/nominal-gdp-formula/

– GDP by Country

https://www.worldometers.info/gdp/gdp-by-country/