Monday, December 20, 2010

Calculating GDP

Y = C + I + E + G

GDP is all goods and services produced deomstically. To calculate GDP all you need to do is add all the components of the economy that are involved with goods and services produced.
C = Consumer Spending

Most goods and services are bought by consumers, making C a variable for how much they spend.
I = Investment made by industry
Investments in this GDP formula are not the investments you normally think of. When calculating the GDP, investment means the purchases made by industry in new productive facilities, or, the process of "buying new capital and putting it to use" (Gambs, John, Economics and Man, 1968, p. 168).
E = Excess of Exports over Imports
This shows how much an economy makes of a good/service and how they much they distribute it throughout the world. It also compares to how much that economy buys goods/services from other economies.
G = Government Spending
This is when the government spends tax money for goods and services for society. Tax isn't "lost", since the government uses that money for public services and goods.

Four Rules for GDP

1. Good/service must be made in your country for it to count in the GDP.

2. Uses local currency for the output of that country.

3. The GDP is calculated for a specific amount of time, ie: years, quarters.

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