Gross Domestic Product (GDP)

Definition
Per Fernando (2025) Gross Domestic Product (GDP) is the total value of domestically produced output, both goods and services. It includes consumer spending, government spending, investment spending, and net exports (exports-imports).

Why It Matters
GDP helps measure the size of a country’s economy and its growth rate.

Limitations
Per Degrowth (2022), Degrowth is a school of thought that challenges GDP as the main indicator of economic progress, amongst others. Degrowth says that rather than pursuing economic growth at all costs, Degrowth proposes “a reduction in the material size of the global economy” and instead within planetary boundaries and a good life for all. Read further here.

GDP Formula
GDP = C + G + I + NX
where,
C = Consumption
G = Government spending
I = Investment
NX = Net exports

All of these activities contribute to the GDP of a country.

Foreign Balance of Trade
The foreign balance of trade, that is, exports minus imports, is important.
A trade surplus is when exports are greater than imports. (GDP rises)
A trade deficit is when exports are less than imports. (GDP decreases)

Nominal vs Real GDP
Per Gans et al. (2021)
Nominal GDP: measured at current prices (includes changes in output and changes in price)
Real GDP: measured at base year prices, and is adjusted for inflation (includes only changes in output).

Works cited:
Fernando, Jason. “Gross Domestic Product (GDP): Formula and How to Use It.” Investopedia, 8 May 2025, www.investopedia.com/terms/g/gdp.asp.

Reserve Bank of Australia. “Economic Growth.” Reserve Bank of Australia, 2025, www.rba.gov.au/education/resources/explainers/economic-growth.html.

Gans, Joshua, et al. Principles of Microeconomics. South Melbourne, Victoria, Australia, Cengage Learning Australia, 2021.

Degrowth. “Degrowth.” Degrowth, 2022, degrowth.info/degrowth.