Gross domestic product is the total value of everything

produced in the country. It doesn't matter if it's

produced by citizens or foreigners. If they are located
within the country's boundaries, their production
is included in GDP.
To avoid double-counting, GDP includes the final value
of the product, but not the parts that go into it. For
example, a U.S. footwear manufacturer uses laces and
other materials made in the United States. Only the
value of the shoe gets counted; the shoelace does not.

Calculating GDP

The components of GDP include personal
consumption expenditures plus business
investment plus government spending plus
(exports minus imports). Now that you know what
the components are, it's easy to calculate a country's
gross domestic product using this standard formula:
C + I + G + (X - M).
C-Private final consumption expenditure
I-Investment
G-government final consumption expenditure
X-export
M-import

Impact of gdp

Business Planning
Businesses use the GDP as a planning tool to decide
whether they will expand or contract in the coming
year. If the GDP has grown since the last year, a com‐
pany may take the growth as a positive sign and hire
more employees, build a new factory or purchase more
raw materials for production. Conversely, when the
GDP shrinks, firms may not focus on expanding their
operations. Instead, many will concentrate on survival.

Changes in Currency Values

When a country releases its GDP data, its currency can

appreciate or depreciate as a result. Let’s say that the
U.S. releases its GDP for the past year, and the GDP
has risen since the last time the data was published.
It will likely take more of a foreign currency--for
example, the British pound--to buy fewer U.S. dollars.
If the U.S. GDP shrinks in comparison to the previous
year, it will generally cost fewer British pounds to
buy more U.S. dollars.

Government Policies

As the GDP measures economic performance,

governments watch it closely. A low GDP will cause
a government to embark on a different economic
policy, one which will boost economic performance.
If, on the other hand, the GDP rises from the
previous year, the government will propose policies
to maintain economic growth, but will also seek
to prevent inflation.

Interest Rate Changes

Rising or shrinking GDP also affects interest rates. The

interest rate refers to the amount of money charged
for loans. In the U.S., the Federal Reserve sets the
basic interest rates. If the GDP rises, it means the eco‐
nomy has grown. GDP growth also means that people
are spending more money to purchase goods on the
market. To prevent inflation, the Federal Reserve will
raise the prime interest rate, making the supply of
money scarcer. When the GDP shrinks, the Federal
Reserve often lowers the interest rate, making it easier
to borrow money and encouraging expenditures.

Last modified: 29 Jun 2019