GDP is a measure of a country’s economic output. It includes all goods and services produced by the nation, whether they are sold to consumers or used internally by businesses. It is calculated as total expenditure on final consumption, plus net exports and minus net imports.
The expenditure approach to GDP calculates changes in GDP by adding up all spending on goods and services by households, businesses, and the government. Consumption spending includes purchases of consumer goods and services, such as food, clothing, and utilities. Investment spending includes the purchase of equipment or building new facilities. Exports include the sale of raw materials, manufactured goods, and services. Imports are the purchase of foreign goods and services.
A country’s GDP is also determined by its level of debt and the price of its natural resources. If a country takes on too much debt and loses access to its natural resources, its GDP will decrease over time. Other factors that can affect a country’s GDP include population growth and changes in consumer confidence, which can lead to changes in spending.
Another limitation of GDP is that it only reflects formal economic activity. It does not account for the value of goods and services provided by unrecorded activities, such as household production or informal work in the black market. Furthermore, GDP does not adjust for quality improvements or the introduction of new products. These factors can make GDP appear higher than it is in reality.