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What is Gross Domestic Product?

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  • Written By: Margo Upson
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 December 2014
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The gross domestic product (GDP) is a means of measuring the economic success of a country. It is determined by calculating a country's economic output, or how much it has produced, throughout the course of a year, and allows that country to compare its success against previous years and other countries. While the measurements received through calculating a country's GDP is not the only way of measuring that country's economic success, it is one of the best.

This measurement is calculated based on four types of spending amounts, or expenditures. The first is personal consumption, and it is the most important aspect when figuring the a country's GDP. This is a total sum of all of the goods and services made and bought in a country. The second expenditure is investments, which includes available, but unsold, inventories, and fixed assets. Fixed assets are buildings, machines, and other things necessary for running businesses that are not readily available for being turned into cash.

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The third aspect that gets calculated into the total GDP amount is government purchases. This number is achieved by taking the total amount of money spent by the government and subtracting any money that went towards payouts, such as welfare costs and unemployment. The final number that goes into a calculation is the amount of net exports, or the amount of goods and services that were made available in other countries. This number is found by taking the total number of exports and subtracting the total number of imports.

The overall gross domestic product is fairly accurate for determining how much a country is spending, but it has several shortfalls. The most important of these is that GDP doesn't consider the quality of life of the people living in the country. For example, Hurricane Andrew, a devastating natural disaster that destroyed the lives and homes of hundreds, if not thousands, of people living in Florida, was tallied up as a $15 million US Dollar (USD) boost to the United State's GDP. There is also no way to measure the distribution of wealth in a country. The top 5% of a country might control the majority of the wealth, but the GDP only shows that the whole country is prosperous, which is almost never the case.

The gross domestic product was an idea developed during World War II for the purpose of measuring wartime production, and it was never actually meant to be used as a tool for calculating the wealth of a country. Since that time, however, it has become one of the most talked about numbers in politics, as a way of discussing the economic health of a country. Unfortunately, it only gives a partial account of how wealthy a country is, or is not, based on factors that have very little to do with the lives of the people actually living in the country, and it should not be used as the only means of calculating a country's wealth.

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