GDP stands for Gross Domestic Product. It is the total market value of services and goods produced in a country throughout a year. It measures the country’s total value of exports as well as the economic performance of the country. GDP differs from Gross National Product because profits produced in firms abroad are eliminated, as are the share of reinvested income in the domestic firm’s foreign-based companies overseas. In the U.S in 1991, the use of GNP was replaced with GDP in order to measure the country’s production and performance.
There are three main approaches of measuring using GDP, each process generating results that are similar. The Product (output) approach, the Income approach and the Expenditure approach are the three ways in which GDP can be determined. The Product approach calculates the outputs of each category of enterprise so as to gain and arrive at the total. The product approach is considered the most direct form of measuring GDP. The Income approach determines to find the total sum of all ‘producers’ income and ensures that the income is equivalent to the value of the product they are dealing with. Interest for capital, the rent paid for land and the wages for labour are all factors taken into account. Finally, the Expenditure approach calculates GDP by evaluating the total outflow of money spent buying things used for production of the product. The value of the product must be equal to the amount paid for buying those things.
The formula used to measure GDP: GDP (Y) is a sum of (C) Consumption, (I) Investment, (G) Government Spending and (X-M) Net Exports.
To summarize: Y=C + I + G + (X-M)