When talking about politics and the economy, one topic that will often come up in conversation or in the news is GDP. GDP stands for gross domestic product and is a measure of a country's economic health. Understanding GDP isn’t hard but you must understand how it is measured and how it is compared.
Understand what GDP is and isn’t. GDP is one measurement and GNP is another. GNP stands for gross national product. The difference between GDP and GNP is simple. GDP measures the total amount of a country's goods and services produced within its geographical borders. GNP measures the goods and services produced by a country's citizens regardless of where they are produced. If a U.S. citizen opens a factory in China, that product is still calculated in America’s GNP.
Calculate GDP. GDP is calculated by adding consumption plus government expenditures plus investments plus exports minus imports. Consumption is personal consumption that includes durable goods (durable goods are goods that are expected to last more than three years), non-durable goods (such as food and clothing) and services. Government expenditures include things like defense and road construction. Investment spending includes plants and equipment, residential homes and business inventory. Finally, subtract imports from exports to get the net exports.
Compare GDP. GDP is often compared in real dollars and constant dollars. GDP can be compared by real dollar amounts or constant dollars, which takes inflation into account to show what a previous years GDP would be today. The department of commerce releases GDP data every quarter for the previous quarter on the last business day of the quarter.