What is Gross Domestic Product (GDP)?
Gross Domestic product is a tool a country uses to best measure its economy. Gross Domestic Product represents the total value of everything people and companies produce within a given country. Whether or not a person is a citizen, or a company is foreign-owned, does not matter.
One is the expenditures approach. The expenditures approach calculates the GDP based on how much money is spent in each individual sector. The other way to calculate it is the income approach. The income approach calculates the GDP based on how much money is earned in each individual sector. One looks at how much money is spent and one looks at how much money is earned, but both methods yield the same results. Both calculations are based on four economic sectors that make up a country’s macroeconomy.
These are the four sectors. Whenever we talk about how the expenditures approach is based on how much money is spent in each individual sector, these are the sectors. When talking about how much is earned in each individual sector during the income approach, these are the sectors.
First, we’ve got consumers. Consumers are the people who are buying the products. Consumers are buying, using, and spending money. Consumers are important. They’re one sector to look at. How many people are buying stuff? How much are they buying? That’s definitely going to affect your economy.
Next, we have business. What is the business content like? Is there a lot of job growth? Is there a decline in jobs? That’s going to affect things in different ways. If businesses are opening, that’s going to mean that more people have jobs, and it’s going to mean that, most likely, there’s going to be more product available to be sold, which will hopefully satisfy the consumers. If business is declining or businesses are closing, that means there are going to be fewer products available in the market. That means that people are going to be losing their jobs, which means they’re going to have less to put into the market. That’s going to take away some of your consumers.
The third sector you’re going to look at is government. Government is also going to be involved in spending. It’s important to see how much they’re spending. During a war, you’re going to have a lot more spent on military provisions than you would during peacetime. The government also will participate in bailouts of certain companies or economies if they need it. Government is also an important thing to look at, because it can have a big impact on the macroeconomy.
The last sector is the foreign sector. This is going to talk about how many goods are coming in from outside the United States and taking away from the products that are being consumed that are American products. Say you lived in the United States and you were buying goods from Mexico. If those goods are made in Mexico, that means people here didn’t have the jobs to make those goods. That was a lower business or labor force here. It means that the United States isn’t making as much money off that product as if it was made here. Similarly, if we are able to export lots of goods, if a certain country is able to export their goods and sell them outside of the United States, that’s going to be a bigger output for them. They’re selling outside of the country. They’re making money come in from outside of the country. More money is hopefully coming in than going out.
Consumers, business, government, and the foreign sector are the four sectors that are looked at whenever using the expenditures approach or the income approach to calculate the Gross Domestic Product.