GDP construction

GDP, or Gross Domestic Product, is the total market value of goods and services produced by an economy, be it a nation or a region, during a specific period of time, mostly a year.

It is also considered the sum of value added at every stage of production of all final goods and services, within a country and a given period of time.

The most common approach to calculating GDP is by expenditure:

GDP, or Yd = (C)onsumption + (I)nvestment + (G)overnment spending + (e(X)ports – i(M)ports)

When an economy achieves full employment of all resources / production factors indicated by a very low unemployment rate, it is producing at its potential GDP. In reality, however, business cycles forces the actual GDP away from the potential GDP, constantly fluctuating on or below it. In recession days and years, high unemployment rate leads to inadequate utilization of resources thus bringing down the production of the economy and finally actual GDP under potential GDP. During expansion time, nevertheless, like those between 1942 and 1945 when people in America are all busy working for WWII, unemployment rate was as low as 1.6% and the actual GDP was even over potential GDP.

NDP and GNP are 2 other ways to assess economic performance of an economy.

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