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 estimated by adding a country’s estimated local consumer spending and local investment, and then adding its trade surplus or subtracting its trade deficit.
GDP differs from gross national product (GNP) 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.
Example of GDP: A large country with a significant population has a very strong local economy, meaning that large volumes of commercial transactions are carried out between companies and individuals within the country’s borders. The country’s resident companies attract large amounts of investment and it also exports more than it imports. All of these factors result in the country having a high GDP.
Understanding GDP is important for investors who are looking to invest in domestic economies and companies which primarily service specific countries.