GDP or gross domestic product is a measure of the total market value of all land goods and services produced within an economy’s borders within a year
This is the most basic metric by which economists determine the size of an economy. Finished goods simply means goods that are not going to be used to make more goods, for example, an engine would not be counted towards GDP figures if it was put into a car, only the value of the car would be.
This stops modern products with thousands of components having their value measured multiple times, it is worth mentioning however that if an engine is produced and then it is sold to a customer who uses it to replace an old engine in their car then that replacement engine would be counted towards GDP figures because it was an end good.
The most common equation that economists use to calculate GDP is consumer spending, plus government spending, plus investments, plus exports minus imports.
If you add up all these figures you get an economy’s total output or GDP, but hang on, why are we looking at consumption and investment when trying to figure out how much stuff an economy makes? Wouldn’t it make more sense to look at all the stuff that the factories and service providers around the country are doing? Well yes, that is certainly possible, but the problem is it’s very difficult to employ millions of economists to stand at the end of every factory’s production line and oversee the work of every service provider in the economy. Fortunately, consumption figures are much easier to collect, and they should theoretically produce the same result, this happens because anything that is produced or any service that is provided will fall into one of these categories. Let’s say a factory produces a water bottle, they can sell that water bottle to a consumer, they could sell it to the government, they could export it overseas, or they could hold on to it which would count as a business investment into inventory. Now the reason it’s important for economists to subtract imports is that if a TV imported from japan is sold in Australia, then it would add value to the consumer spending portion of Australian GDP, which would give the economist an unfair impression of how much Australia produced in that year. So by subtracting the value of all imports, that issue just fixes itself
Calculating GDP is still a big task and requires lots of data to be collected on everything from sales, taxes, export records, and government budget reports. Sometimes these figures can be open to a certain amount of interpretation which is why GDP figures from different organizations can be slightly different. That is why it’s important to use figures from the same source when comparing the size of different national economies.
The world bank and the international monetary fund are what most economists will use.
