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9/10/2015

WhatisGDPandwhyisitsoimportanttoeconomistsandinvestors?
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What is GDP and why is it so important to economists and


investors?
By Investopedia Staff

AAA |

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A:

The gross domestic product (GDP) is one the primary indicators used to gauge the
health of a country's economy
economy.. It represents the total dollar value of all goods and
services produced over a specific time period - you can think of it as the size of the economy.
Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if
the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3%
over the last year.
Measuring GDP is complicated (which is why we leave it to the economists), but at its most
basic, the calculation can be done in one of two ways: either by adding up what everyone
earned in a year (income approach), or by adding up what everyone spent (expenditure
method). Logically, both measures should arrive at roughly the same total.
The income approach, which is sometimes referred to as GDP(I), is calculated by adding up
total compensation to employees, gross profits for incorporated and non incorporated firms,
and taxes less any subsidies. The expenditure method is the more common approach and is
calculated by adding total consumption, investment, government spending and net exports.
As one can imagine, economic production and growth, what GDP represents, has a large
impact on nearly everyone within that economy. For example, when the economy is healthy,
you will typically see low unemployment and wage increases as businesses demand labor to
meet the growing economy. A significant change in GDP, whether up or down, usually has a
significant effect on the stock market. It's not hard to understand why: a bad economy usually
means lower profits for companies, which in turn means lower stock prices. Investors really
worry about negative GDP growth, which is one of the factors economists use to determine
whether an economy is in a recession
recession..
For more on this topic, see Is real GDP a better index of economic performance than GDP?
and Macroeconomic Analysis.
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RELATED FAQS
Q: What is the difference between GDP and GDP accounting for PPP (purchasing power
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9/10/2015

WhatisGDPandwhyisitsoimportanttoeconomistsandinvestors?

A: The standard measure of gross domestic product, or GDP, is absolute. In contrast, some accounts of
GDP are adjusted for relative ... Read Full Answer >>

Q: When do economists use real GDP instead of GDP?


A: Economists use real GDP when they want to monitor the growth of output in an economy. Nominal

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Are you interested in generating income?

GDP, typically referred to ... Read Full Answer >>

Q: Is real GDP a better index of economic performance than GDP?


A: Real GDP is a much better index for expressing the output of an economy, as it takes into account the

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fluctuating value of ... Read Full Answer >>

Q: What are some alternatives to real GDP?


A: Real GDP is used for assessing a countrys economic performance over a given time. Other measures
used for this are nominal ... Read Full Answer >>

Q: Which countries are most productive in terms of GDP?


A: If you are measuring productivity based on Gross Domestic Product (GDP), the ten most productive
countries in the world are, ... Read Full Answer >>

Q: What is the benefit of using real GDP over GDP?


A: Economists use the gross domestic product (GDP) to compare the relative prosperity of different
nations and measure the overall ... Read Full Answer >>

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