In economics, the term gross domestic product (GDP) denotes an indicator of a country’s economic activity. The value of the total economic activity which occurs within a country’s borders.
Gross domestic product is calculated by adding estimated local consumer spending and local investment within a country. The country's exports are then added to the resulting figure, and imports are subtracted from it.
GDP differs from gross national product (GNP) particularly in that it only indicates the scale of a country’s local economy, while GNP accounts for commercial activity carried out by a country’s citizens and resident companies outside of its borders.
Factors which drive up a country's GDP:
- Many transactions between companies and individuals within the country
- High investments in the country's companies and infrastructure
- The country exports more goods and services than it imports
When a country's GDP increases, the country is said to be experiencing economic growth. The affluence of a country can be measured by comparing its economic growth with the growth of its population. The higher the GDP is in relation to the population, the more affluent the country is. If a country's population grows faster than its GDP, then its affluence will decrease, even if its economy grows.
Understanding GDP is important for investors who are looking to invest in domestic economies and companies which primarily service specific countries.
More on this topic:
Gross national product explained
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