A nation’s gross domestic product (GDP) represents the market value of all the goods and services produced within its borders in a given period. GDP is commonly used as a broad measure of economic performance, and it is often compared between countries to evaluate the relative wealth or standard of living between them. GDP is also an important metric when analyzing trends in a country’s economy, and changes in GDP are frequently reported by financial news organizations.
The official definition of GDP includes four main categories: consumption, investment, government expenditures, and net exports. Consumption (C) represents the spending by households on final goods and services such as food, jewelry, gasoline, and medical expenses. The spending on durable goods and services is a significant component of GDP, as are the purchases of financial products like stocks and bonds. Investment (I) represents the capital expenditures by businesses on equipment and other assets. The purchase of replacement goods and services is considered a part of investment, as are the acquisitions of business-to-business inputs. Government expenditures (G) represent the sum of public sector wages and payments for social security benefits as well as defense and police spending. The net exports (NX) figure is calculated as GDP less the sum of a country’s imports.
GDP is typically measured in the country’s currency, so comparisons between nations require adjustment. One way to address this issue is by using purchasing power parity exchange rates, which adjust the prices of imported and exported goods and services to account for differences in the cost of living between countries. Another method is to use “real” or “chained” GDP, which adjusts for inflation to allow comparisons between periods.
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