gross domestic product

noun
Updated on: 26 Jul 2017

Definition of gross domestic product

  1. :  the gross national product excluding the value of net income earned abroad

First Known Use of gross domestic product

1951


Financial Definition of GROSS DOMESTIC PRODUCT

gross domestic product

What It Is

Gross Domestic Product (GDP) is the broadest quantitative measure of a nation's total economic activity. More specifically, GDP represents the monetary value of all goods and services produced within a nation's geographic borders over a specified period of time.

How It Works

The Department of Commerce releases GDP data for the U.S. economy on a quarterly basis at 8:30 am EST on the last business day of the next quarter.

The equation used to calculate GDP is as follows:

GDP = Consumption + Government Expenditures + Investment + Exports - Imports

The components used to calculate GDP include:

Consumption:
Durable goods (items expected to last more than three years)
Nondurable goods (food and clothing)
Services

Government Expenditures:
Defense
Roads
Schools

Investment Spending:
Nonresidential (spending on plants and equipment), Residential (single-family and multi-family homes)
Business inventories

Net Exports:
Exports are added to GDP
Imports are deducted from GDP

The GDP report also includes information regarding inflation:
The implicit price deflator measures changes in prices and spending patterns.
The fixed-weight price deflator measures price changes for a fixed basket of over 5,000 goods and services.

GDP is calculated both in current dollars and in constant dollars. Current Dollar GDP involves calculating economic activity in present-day dollars. This, however, makes time period comparisons difficult due to the effects of inflation. By comparison, Constant Dollar GDP factors out the impact of inflation and allows for easy comparisons by converting the value of the dollar in other time periods to present-day dollars.

Why It Matters

When GDP declines for two consecutive quarters or more, by definition the economy is in a recession. Meanwhile, when GDP grows too quickly and fears of inflation arise, the Federal Reserve often attempts to stimulate the economy by raising interest rates.


GROSS DOMESTIC PRODUCT Defined for English Language Learners

gross domestic product

noun

Definition of gross domestic product for English Language Learners

  • : the total value of the goods and services produced by the people of a nation during a year not including the value of income earned in foreign countries


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