GDP Definition. Gross Domestic Product, or GDP, is a measure of a country’s economic performance and consists of the total value of a country’s output, comprised of all goods and services produced within the country’s physical borders. Unlike Gross National Product, GDP excludes profits made by domestic firms overseas, as well as the share of reinvested earnings in domestic firms’ foreign-based operations. In 1991, the United States switched from using GNP to using GDP as its primary measure of production. GDP can be determined in three ways. In theory, each method should produce similar results. The three methods are the product (or output) approach, the income approach, and the expenditure approach. The product approach is the most direct of the three methods. It sums the outputs of every class of enterprise to arrive at the total. The income approach assumes that the incomes of the productive factors, or “producers”, must be equal to the value of their product, and determines GDP by finding the sum of all producers’ incomes. The expenditure approach postulates that somebody must buy the entire inventory of products produced, and therefore, the value of the total product must be equal to people’s total expenditures in buying things.
Calculation of GDP is summarized by the following formula: GDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M).
Y = C + I + G + (X – M)