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Understanding Gross Domestic Product


When economists analyze the economy, one of the most important numbers they use is the GROSS DOMESTIC PRODUCT or GDP. The gross domestic product is an estimate of the monetary value of all the goods and services produced within a specific region of the world during a certain time period. (We will discuss the idea of "goods and services" in Section 3.)

Economists often look at the GDP for an entire country for one year. For example, I might tell you that, in 2012, the GDP of the United States was $15.68 trillion. This means that, in 2012, the United States as a whole produced $15.68 trillion worth of goods and services.

We tend to use GDP values in two important ways. First, to measure economic progress over time. For example, if we want to see how much the economy of the United States is expanding, all we need to do is look at the change in its GDP from one year to the next.

Second, we can use GDP values to compare different countries or regions to one another. For instance, suppose we want to estimate how much bigger the United States economy is than, say, the Canadian economy. All we have to do is compare the U.S. GDP to the Canadian GDP. Similarly, if we want to compare the economy of the European Union to the economy of China, we can compare the GDP of the European Union to the GDP of China.

In this essay, I will explain the basic concepts regarding GDP. We will then take a look at GDP values for various parts of the world, analyze them in several ways, and then discuss the ways in which such values are used. Finally, we will look at the factors that influence the GDP of a country and why they are important.

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